Page 105 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives Rupesh Roshan Singh, Lovely Professional University

Notes Unit 7: Application of Futures Contracts

CONTENTS
Objectives

Introduction
7.1 Payoff for Futures Derivatives Contracts
7.1.1 Going Long – Buy Futures
7.1.2 Going Short – Sell Futures
7.1.3 Long Hedging – Short Spot and Long Futures

7.1.4 Short Hedging — Long Spot and Short Futures
7.2 Difference between Trading Securities and Trading Futures on Individual Securities
7.3 Use of Futures (Only Simple Strategies of Hedging, Speculation and Arbitrage)
7.3.1 Process of Hedging through Futures
7.3.2 Speculation using Futures Contracts

7.3.3 Arbitrage Benefits Using Futures
7.4 Futures Application
7.4.1 Passive Management: Index Fund
7.4.2 General Strategy: Deposits to Portfolio
7.4.3 Beta Control

7.4.4 Asset Allocation Strategy
7.5 Summary
7.6 Keywords
7.7 Review Questions

7.8 Further Readings
Objectives

After studying this unit, you should be able to:
 Discuss the payoff for futures derivatives contracts;
 Describe the difference between trading securities and trading futures on individual
securities;
 Explain the simple strategies of hedging, speculation and arbitrage;
 Solve the application-based problems of futures.

Introduction

In the previous unit, we understood the basic principles and concept of valuation of options. We
also discussed about the pricing of option, the primary option pricing factors, options pricing

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