Page 142 - DCOM510_FINANCIAL_DERIVATIVES

Unit 9: Trading Futures and Option

Futures are useful to the market participants only if futures prices reflect information about the Notes
prices of the underlying assets. That is why it is essential to understand how futures markets
work and how the prices of futures contracts relate to the spot prices. In this section, we will
examine the factors that affect futures prices in general. The futures prices of different assets like
commodities, foreign exchanges and securities are influenced by various factors which are not
common for all such assets. For example, futures prices of foreign currencies may be determined
by different factors as different for determination of futures prices of food grains and vegetables.

9.1 Futures and Options Trading System

The futures & options trading system of NSE, called NEAT-F&O trading system, provides a fully
automated screen-based trading for Nifty futures & options and stock futures & options on a
nationwide basis as well as an online monitoring and surveillance mechanism. It supports an
order driven market and provides complete transparency of trading operations. It is similar to
that of trading of equities in the cash market segment.

Notes The software for the F&O market has been developed to facilitate efficient and
transparent trading in futures and options instruments.

Keeping in view the familiarity of trading members with the current capital market trading
system, modifications have been performed in the existing capital market trading system so as
to make it suitable for trading futures and options.

Did u know? Future contracts are traded for the following reasons:
Leverage
One of the key benefits of trading in the futures markets is that it offers the trader financial
leverage. Leverage is the ability of a trader to control large dollar amounts of a commodity
with a comparatively small amount of capital. As such, leverage magnifies both gains and
losses in the futures market.

Liquidity
Another key benefit of futures trading is liquidity. Liquidity is a characteristic of a market
to absorb large transactions without a substantial change in the price. Liquid markets
easily match a buyer with a seller, enabling traders to quickly transact their business at a
fair price.

Transparency
Many futures markets are considered to be “transparent” because the order flow is open
and fair. Everyone has an equal opportunity for the trade. When an order enters the
marketplace, the order fills at the best price for the customer, regardless of the size of the
order.

Financial Integrity
When making an investment, it is important to have confidence that the person on the
other end of the trade will acknowledge and accept your transaction. Futures markets give
you this confidence through a clearing service provider system that guarantees the integrity
of your trades.

LOVELY PROFESSIONAL UNIVERSITY 137