1. 11 Financial Derivatives

2. 22 2. Basic Understanding about Future i.Futures are always Exchange Traded (where as forward are always OTC Product). ii.Futures are financial Contracts (or Products or Instruments) to buy or sell the Specified amount, the price of which is agreed today for settlement at Specified Future Date. Party A Party B Enters into a contract to buy SBI Future Right : To receive the underlying in specified quantity. Obligation: To pay agreed price Right : To receive agreed price Obligation: To deliver specified Quantity of SBI Shares.

3. 33 iii.Meaning of Buying and Selling of Future : To interpret buying and selling of future contract we should think in terms of taking or delivery of the underlying. Buying Future Selling Future To take delivery of the underlying To give delivery of the underlying iv. All future contracts requires concept of Margin : Initial Margin [ Security Deposit ] Payable immediately after entering into contract.Both buyer as well as seller pays this amount to broker who inturn deposit with Stock Exchange. B/S item shown as receivables MTM Margin [ Marking to Market Margin ] Calculated on daily basis till contact expiry date. P & L A/c item.

4. 44 v.How to use Future for Hedging : [ Strategy for Hedging using Future Contract ] Physical Position Concern Hedging Strategy. Long Falling Price Sell Future Contract (short) Short Increasing Price Buy Future Contract (long)