A workshop on

Future Contract and Call

Option
Submitted By
T.Y.B.F.M
Semester-V
2016-17

Submitted To

Future Contract and Call

Option
Future Contract.
Meaning:
Future contract is standardized agreement
between two parties that a) commits one to sell
and other to buy a stipulated quantity and grade of
commodity, currency, security, index or other
specified item at a set price on or before a given
date in the future; b) requires the daily settlements
of all gains and losses as long as the contract
remains open; and c) for contracts remaining open
until trading terminates, provides either for
delivery or a final cash payment (cash settlement).

Features of Future Contract:

1)Highly Standardized: They traded only in organized
stock exchange. A standardized future contract has
a specific:
a) Underlying instrument: The commodity,
currency, financial instrument or index upon
which the contract is based.
b)
Size: The amount of the underlying item
covered by the contract.
c) Delivery cycle: The specified months for which
contracts can be traded.
2)Initial Margin: The contracting parties deposit a
certain percentage of the contract price with the
exchange and it is called as initial margin. This
gives guarantee that the contract will be honoured.
The percentage is generally 15-20%.

3)Settlement mechanism: Future contracts are

marked to marked each day at their end-of-day
settlement prices, and the resulting daily gains and
losses are passed through to the Buyers/Sellers
accounts;
4)Hedging of Price Risks: The main feature of a future
contract is to hedge against price fluctuations. The
buyers of a future contract hope to protect
themselves from future spot price increases and
the sellers from future spot price decreases.
5)Linearity: Parties to the contract get symmetrical
gains or losses due to price fluctuation of the
underlying asset on either direction
6)Secondary Market: Futures are dealt in organized
exchanges for e.g. NSE F&O, NSE F&O and such
they have secondary market too.
Futures contracts enable investors to use various
tactics that can prove profitable while trading. One
can resort to arbitrage,
Hedging and speculation depending on ones
objectives.

Problems on Future Contracts:

Amir bought futures of Axis Bank. When the future
is at 1980 and at expiry the cash market price
closes 1900.Find the profit or loss when the lot
size is 100 shares ?

Solution:
Bought a future contracts Axis Bank
Buying price of Axis Bank=1,980
Expiry price of Axis Bank=1,900
Lot size is 100 shares
Profit/Loss=Expiry price-Buying price*Lot size
Loss= (1,900-1,980) *100
Loss= -80*100

Loss= -8,000
Mr. Amir incurred a loss of 8,000 on Axis Bank
Future Contract.

Meaning:

CALL OPTION

Call option gives the buyer the right, but not

the obligation, to but a given quantity of the
underlying asset, at a given price on or
before a given future date.
Call Option Buyer
Pays premium.
Right to exercise and
buy the shares.
Profits from rising
prices.
Limited losses,
potentially unlimited
gain.

Call Option
Writer(Seller)
Receives premium.
Obligation to sell
shares if Exercised.
Profit from falling prices
or remaining neutral.
Potentially unlimited
losses, limited gain.

Problem on Call Option:

Mr. Rajesh sold a put option of RIL for 100

at a strike price 800, market price 840 on

expiration:
a) 1000
b)700

c) 900

Solution:
a) 1000 100 profit 100
b) 700 no profit no loss
c) 900 profit 100