Page 177 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes 5. Which of the following prices is used to compute MTM of a futures contract in case it is not
traded on a given day?
(a) Closing price of the underlying

(b) Closing price of the futures contract
(c) Theoretical price
(d) MTM is not levied in such cases

11.3 Settlement Mechanism

All futures and options contracts are cash settled, i.e. through exchange of cash. The underlying
for index futures/options of the Nifty index cannot be delivered. These contracts, therefore,
have to be settled in cash.

!
Caution Futures and options on individual securities can be delivered as in the spot market.
However, it has been currently mandated that stock options and futures would also be cash
settled. The settlement amount for a CM is netted across all their TMs/clients, with respect to
their obligations on MTM, premium and exercise settlement.

Table 11.5: Determination of open Position of Clearing Member

TMs Proprietary trades Trades: Client 1 Trades: Client 2
Clearing Buy Sell Net Buy Sell Net Buy Sell Net Long Short
Through
CM
ABC 4000 2000 2000 3000 1000 2000 4000 2000 2000 6000 -
PQR 2000 3000 (1000) 2000 1000 1000 1000 2000 (1000) 1000 2000
Total 6000 5000 +2000 5000 2000 +3000 5000 4000 +2000 7000 2000
-1000 -1000

11.3.1 Settlement of Futures Contracts

Futures contracts have two types of settlements, the MTM settlement which happens on a
continuous basis at the end of each day, and the final settlement which happens on the last
trading day of the futures contract.
MTM Settlement: All futures contracts for each member are marked-to-market (MTM) to the
daily settlement price of the relevant futures contract at the end of each day. The profits/losses
are computed as the difference between:

1. The trade price and the day’s settlement price for contracts executed during the day but not
squared up.
2. The previous day’s settlement price and the current day’s settlement price for brought
forward contracts.
3. The buy price and the sell price for contracts executed during the day and squared up.
Table 11.6 explains the MTM calculation for a member. The settlement price for the contract for
today is assumed to be 105. The table gives the MTM charged on various positions.

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