• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

What are the profits and losses in case of a futures position?

The profits and losses would depend upon the difference between the price at which the position is opened and the price at which it is closed. Let us see some examples.

Example 1

· Position - Long - Buy June Sensex Futures @ 4,800

· Payoff -

· Profit - if the futures price goes up

· Loss - if the futures price goes down

· Calculation - The profit or loss would be equal to fifty times the difference in the two rates.

· If June Sensex Futures is sold @ 4,900 there would be a profit of 100 points which is equal to Rs. 5,000 (100 X 50).

· However if the June Sensex However if the June Sensex Futures is sold @ 4,750, there would be a loss of 50 points which is equal to Rs. 2,500 (50 X50)

Example 2

· Position - Short - Sell June Sensex Futures @ 4,600

· Payoff -

· Profit - if the futures price goes down

· Loss - if the futures price goes up

· Calculation - The profit or loss would be equal to fifty times the difference in the two rates.

· If June Sensex Futures is bought @ 4,800 there would be a loss of 200 points which is equal to Rs. 10,000 (200 X 50).

· However, if the June Sensex Futures is bought @ 4,500, there would be a profit of 100 points which is equal to Rs. 5,000 (100 X50).

What happens to the profit or loss due to daily settlement?

In case the position is not closed the same day, the daily settlement would alter the cash flows depending on the settlement price fixed by the exchange every day.

However, the net total of all the flows every day would always be equal to the profit or loss calculated above. Profit or loss would only depend upon the opening and closing price of the position, irrespective of how the rates have moved in the intervening days.

How does the Initial Margin affect the above profit or loss ?

The initial margin is only a security provided by the client through the clearing member to the exchange. It can be withdrawn in full after the position is closed.

Therefore it does not affect the above calculation of profit or loss.

However there would may be a funding cost / transaction cost in providing the security.

This cost must be added to your total transaction costs to arrive at the true picture. Other items in transaction costs would include brokerage, stamp duty etc.

What is a spread position?

A calendar spread is created by taking two positions simultaneously

1. A long position in a futures series expiring in any calendar month

2. A short position in the same futures as 1 above but for a series expiring in any month otherthan the 1 above.

Examples of Calendar Spreads

1. Long June Sensex Futures - Short July Sensex Futures

2. Short July Sensex Futures - Long August Sensex Futures

A spread position must be closed by reversing both the legs simultaneously. The reversal of 1 above would be a sale of June Sensex Futures while simultaneously buying the July Sensex Futures.

How are spread rates calculated?

The profit or loss in the case of spreads depends only upon the difference between the rates for the two different calendar months. The real position is only of the differential - irrespective of the two rates.

How do we calculate spreads in case of two-way quotations?

In case the prices are quoted as bid and offer, the spreads would also have a two-way quotation. While calculating use thumb rule that the spread rate calculated must have the maximum spread possible from the two given rates.

Another thumb rule to check the correctness of calculation is that the bid offer difference of the spread must be equal to the sum of the bid-offer differences of the two futures contract.

For example the bid-offer difference for June-August spread is 12 points which is equal to the sum of the bid-offer difference of June Futures (2 points) and August Futures (10 points).

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
SPEED-e service to clients

Copyright © 2005, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line