futures market

7/28/2019 Futures Market

1/24

LEARNING THROUGH

MOVIEBADMAASH COMPANY (2010)

PRESENTED BY :

KISHORE (22)

KRITI VERMA (23)

KUMAR GAURAV (24)

KUMUD (25)

KUNAL KISHORE (26)

MANOJ PANT (27)

HARSHVARDHAN (28)

NAMRATA JAIN (29)

NEHA AGRAWAL (30)


2/24

SYNOPSIS

BADMAASH COMPANY

CONCEPTS :

1. BUYING AND SELLING OF

SHARES IN SHARE MARKET

2. FUTURES MARKET

(DERIVATIVES)


3/24

Becoming Familiar

With the FuturesMarket


4/24

Becoming Familiar With the

Futures Market1. Define the futures market and itsfunctions .

2. Describe the different futures market

participants.3. Understand the clearing house and

margins.

4. Short and long contracts.


5/24

Objective 1:

Define the futures market.

Functions of the futures market.


6/24

6

Futures Contract

Futures contract: standardized agreement between two

parties committing one to buy and the other to sell at a set

price on or before a given date in the future .

Initial Margin: Minimum amount required to initiate atrade

Maintenance margin: Minimum amount required at all

times to sustain a market position

Margin call: when margin level is lower thanmaintenance margin


7/24

Define A Futures Contract Cont.

There are two ways that a futures contract canbe settled.

o Delivery

o Less than 1% of all contracts traded is deliveredon.

o Offsetting.o Means to do the opposite of what you had

previously done.

o Example: if you had previously bought a contract,you sell it back. If you had sold one, then youbuy it back.


8/24

Objective 1: The Functions of the

Futures Market1. Provide an efficient and effective mechanism for the

management of price risk.

2. Provide a source of information for decision making.

3. Provide a means for firms to secure additional operating

capital.


9/24

Objective # 2

Describe the different futures

market participants


10/24

Objective 2: Describe the different futures

market participants

1. There is a difference between traders and

brokers:

1. Traders1. buy and sell contracts for him or her self

does not take customer orders.

2. Brokers

1. take customers orders; may trade for him or

her self, but first responsibility is his

customer.


11/24


market participants

1. We can classify the people who are the futuresmarket participants into several differentcategories. The general public that trades would

be in the last two categories: either publicspeculators or hedgers.

1. Brokers: fill orders for outside speculators andhedgers.

2. Professional Speculators: trade for own accounts.3. Scalpersbuys and sells minute by minute.


12/24


market participants.

4. Traderstake large positions and hold for several

days.

5. Hedgers: Producers or users of commodities who

seek protection against adverse price changes bytaking a futures position opposite to cash position.

6. Public speculators: Place orders with brokers to

profit from anticipated price changes. Not

necessarily interested in owning the commodity, butonly in profiting off movements in the price.


13/24

Objective 3

Understand the clearinghouse and

margins


14/24

Objective 3: Understand the

clearinghouse and margins Clearing House

o Assumes the opposite side of every trade so that all

connections between buyers and sellers are served.

o Because the number of buys = number of sells, the

clearing house has no net position.


15/24

Objective 3: Margins

1. To trade you must have an account.

2. With every new trade, traders must deposit moneycalled margin.

3. Margins serves as a deposit.4. Initial margin: initial deposit paid.

5. Maintenance Margin: minimum amount of money thatmust be kept in accounts.

6. Margins are NOT a COST for trading futures. Yourmargin money is a deposit in your account and if yourtrade is not a losing trade, you will still have yourmargin money.

7. The clearing house marks-to-market all open

positions at the end of a day to adjust all accounts.


16/24

Objective 4:Short and Long positions.


17/24

Objective 4: Short Position

The term to sell is also known as a short

position. To be short means that you are

trying to protect the commodity in yourpossession from falling prices. Producers

are generally sellers of short position

holders.

Short = Sell = Protect from falling prices =

producer.


18/24

Objective 4: Long Position

The term to buy is also known as a long

position. To be long means that you are

trying to protect the purchase price of acommodity that you plan on obtaining

from rising prices. Mills, Factories, and

packers would be long position holders

Long = Buy = protect from increasing

prices = Mills, factories, packers


19/24

Simple Rule:

Buy Low and Sell

High in either order


20/24

Normal Market

1. Normal Market is nearby price is lower than thedistant contract priceso prices increase into thefuture. It reflects the cost of storage. For example,if the nearby month is Dec and the Dec price is 2.32

and the March price 2.39 and the May price is 2.44and the July Price is 2.48 and the Sept price is 2.57then the market is normal.

2. Is common when supplies are large.

3. Tells the trader what the market will pay for storage.4. Futures price spreads rarely reflect full carrying

charge.


21/24

Inverted Market

1. Inverted Market =

1. nearby prices are higher than distant contract pricesSo prices decrease into the future.

2. It reflects a negative price of storage. In otherwords, we are in short demand of the product so themarket price is telling you that they will pay a

premiums if the product is delivered nowdo notstore the product until later.

3. For example, if Dec is the nearby month again, butthis time the Dec price is 2.32, the March price is2.28, the May price is 2.20, the July price is 2.16,and the Sept price is 2.10, now the market isinverted.


22/24

Inverted Market Cont.

4. Usually prevails when supplies are small.

5. Market says they will pay a premium if you

deliver now.

6. Reflects negative price of storage.


23/24

Any Questions


24/24

Quiz

1. What is a futures contract?

2. What are the two ways a futures contract can besettled?

3. Who are the participants in the futures market?4. What is a Maintenance Margin?

5. What is a Short Position?

6. What is a Long Position?

futures market

Documents