FD Presentation
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Anzir FerdousFD Presentation
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Anzir FerdousMechanics of Future
Markets
Origin
Derivates originated as hedging devices against fluctuations in commodity prices
Chicago Mercantile Exchange
Chicago Board of Trade
Corn Futures Contract Traded on CBOT
Futures Contract
A Futures Contract calls for delivery of an asset at a specifies delivery or maturity date,
for an agreed upon price called the futures price, to be paid on contract maturity
Long Short
Position Position
Closing Out Positions
• Most buyers and sellers of future contracts do
not acturally make or take delivery of the
underlying asset
• Closing anytime before contract expiration
date or on the settlement date
• Obligations net out when traders close
Specifications of Future
Contract
• Asset
• Contract Size
• Lot Size
• Delivery Arrangement
• Delivery Months
Price limit & Position limit
• Price Limit:
• Limit
• Limit Up
• Limit Down
• Results
• Circuit breaker (Bangladeshi Perspective)
• Position Limit:
• Shareholder’s holdings limitations
• Results
Note: We take some of our classmates as examples for making an interesting presentation. These all taken from imagination and everybody requested to
not take it personally.
Convergence of Future Price to
Spot Price
*If than it proves that the market is Efficient.
*If than it proves that there is a clear arbitrage opportunity belongs.
Note: We take some of our classmates as examples for making an interesting presentation. These all taken from imagination and everybody requested to not take it
personally.
Convergence of Future Price to
Spot Price
Margin account:
*Buy 2 gold futures contracts
*1 contract= 100 ounce
*2 contract = 2X100 = 200 ounce
*Price $1600 per ounce
Initial margin:
*$7000 per contract
* (2X7000)= $14000
*If the price has dropped by $10 from $1600 to $1590
The investor has loss= (200X10) = $2000
Margin account balance= (14000-2000) = $12000
*If the price goes up by $10 from $1600 to $1610
Margin account balance = (14000+2000) = $16000
*If maintenance margin= $4000 per contract
*Total= ($4000x2) = $8000
*The contract is entered into on Day 1 at $1600 and closed out on Day 5 at $1575
* Margin call top up =(14000-6800) = 7200
Day Trade Settlement Daily Cumulativ Margin Margin
price price gain e gain account call
balance
1 1600 14000
1 1590 -2000 -2000 12000
2 1586 -800 -2800 11200
3 1596 1200 -1600 12400
4 1570 -5200 -6800 7200 6800
5 1575 1000 -5800 8200
Clearing House
*A clearing house is a financial institution formed to facilitate the exchange of
payments, securities, or derivatives transactions. The clearing house stands
between two clearing firms. Its purpose is to reduce the risk of a member firm
failing to honor its trade settlement obligations.
*If the clearing house member has two clients:
1. One with a long position in 25 contracts, the other with a short position in 20
contracts.
2. The initial margin would be calculated on the basis of 5 contracts.
3. Clearing house members are required to contribute to a guaranty fund. This may be
used by the clearing house in the event that a member fails to provide variation margin
when required to do so, and there are losses when the member’s positions are closed
out.
OTC Market
*Over-the-counter (OTC) markets are markets where companies
agree to derivatives transactions without involving an exchange.
*If company A defaults when the net value of the outstanding
transactions to company B is positive, a loss is likely to be taken
by company B.
*Similarly, if company B defaults when the net value of
outstanding transactions to company A is positive, a loss is likely
to be taken by company A.
Future trades versus OTC trades
*The variation margin constitutes the daily settlement because
clearing house members provide The daily variation margin for
futures contracts does not earn interest.
*Transactions in the OTC market, whether cleared through CCPs
or cleared bilaterally, are usually not settled daily.
*The market value of the securities is reduced (which is called
HAIRCUT) by a certain amount to determine their value for
margin purposes.
Types of Traders
1. Futures Commission Merchants(FCMs)
Follow client’s orders &
Charge a commission .
2. Locals
trade their own account.
Types of Orders
1. Limit order.
2. A stop order or stop-loss order.
3. Market if Touched (MIT) order.
Limit order
A stop order or stop-loss order :
Stop limit order
Market-If-Touched (MIT) order
Forward contract vs Future
contract
Example of forward contract : contract Between Mango farmer & Pran
juice
Example of future contract : Treasury bills, stocks
