Page 136 - DCOM507_STOCK_MARKET_OPERATIONS

Unit 6: Trading Strategies

6.7.3 Simple Strategies in Futures Market Notes

The following simple strategies are popular in the futures market:
Commodities Futures Market
Buy a future to agree to take delivery of a commodity to protect against a rise in price in the
spot market as it produces a gain if spot prices rise. Buying a future is said to be going long.

Sell a future to agree to make delivery of a commodity to protect against a fall in price in the
spot market as it produces a gain if spot prices fall. Selling a future is said to be going short.
Interest Rate Future
Selling short an interest rate futures contract protects against a rise in interest rates.

Purchasing long an interest rate futures contract protects against a fall in interest rates.
Future Rate Agreements (FRAs).
Selling short on FRA protects against a fall in interest rates.
Purchasing long on FRA Protects against a rise in interest rates.
Currency Futures

Buying long a currency future protects against a rise in currency value.
Selling short a currency future protects against a fall in currency value.
Margining in Futures Market
Whole system dwells on margins:
Daily Margins
Initial Margins

Special Margins
Compulsory collection of margins from clients including institutions.
Collection of margins on the Portfolio basis not allowed by L. C. Gupta committee.
Daily Margins
Daily margins are collected to cover the losses that have already taken place on open
positions.

Price for daily settlement - Closing price of futures index.
Price for final settlement - Closing price of cash index.
For daily margins, two legs of spread positions would be treated independently.
Daily margins should be received by CC/CH and/or exchange from its members before
the market opens for the trading on the very next day.

Daily margins would be paid only in cash.
Initial Margins
Margins to cover the potential losses for one day.
To be collected on the basis of value at risk at 99% of the days.
Different initial margins on:
Naked Positions

Short positions 100 [exp (3s ) – 1]
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