Page 120 - DCOM510_FINANCIAL_DERIVATIVES

Unit 7: Application of Futures Contracts

Notes
Example: Let us assume that we wish to structure an index fund of `10 million and that
the current price of the S&P 500 future is ` 500. Each contract is, therefore, equivalent to a
common stock exposure of 500 times ` 500, or ` 2,50,000. To gain an exposure of ` 10 million in
common stocks, one could easily and quickly purchase 40 S&P 500 futures contracts.
Their advantages are:
 Lower transaction costs

 Higher liquidity in futures markets
 Portfolio construction via futures market offers the advantage of actually buying the
index

 No dividends to reinvest.

Did u know? The maximum brokerage chargeable by a trading member in relation to
trades affected in the contracts admitted to dealing on the F& O segment of NSE is 2.5% of
the contract value. The transaction charges payable by a TM for the trades executed by him
on the F&O segments are fixed at ` 2 per lakh of turnover (0.002%) (each side) or ` 1 lakh
annually, whichever is higher. The trading members also contribute o the Investor
Protection Fund of F&O segment at the rate of ` 10 per crore of business done.
Stock Futures

Trading in individual stock futures have commenced on NSE from November 2001. These
contracts are cash settled on a T+1 basis. The expiration cycle for stock futures is the same as for
index futures. A new contract is introduced on the trading day following the expiry of the near
month contract.
Stock index futures are traded in terms of number of contracts. Each contract is to buy or sell a
fixed value of the index. The value of the index is defined as the value of the index multiplied by
the specified monetary amount. In the S&P 500 futures contract traded at the Chicago Mercantile
Exchange (CME), the contract specification states:
1 Contract = $250 * Value of the S&P 500

Did u know? Speculating using stock index futures is exactly the same as speculating in any
futures contract; taking the Long side when bullish and taking the short side when bearish.

7.4.2 General Strategy: Deposits to Portfolio

A second application of futures involves cash contributions (withdrawals) or a large deposit to
an existing portfolio. Buying additional common stock with a sudden large cash inflow may
take time – time during which one is exposed to significant market moves.
Stock index futures offer an alternative.

Example: Let us assume that on day one ` 50 million is deposited to the portfolio. This
deposit could immediately be invested in the stock market and the desired stock market exposure

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