Page 63 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes Offset: Elimination or reduction of a current long or short position by making an opposite
transaction of the same security.
Portfolio: The group of assets - such as stocks, bonds and mutual funds - held by an investor.

Stock index futures: These futures contract without actual delivery were introduced only in 1982
and are the most recent major futures contract to emerge.

4.7 Review Questions

1. What is a futures contract? Explain with examples.
2. Discuss the types of financial futures contracts and explain its uses.
3. Discuss the types of traders in futures markets with suitable examples.
4. Discuss the statement: ‘The basic function of futures contract is hedging’.
5. Briefly highlight the various methods of settling future contracts.

6. Compare and contrast between forward contracts and futures contracts with suitable
examples.
7. The payoff for a person who buys a futures contract is similar to the payoff for a person
who holds an asset. Discuss with suitable example.
8. If the index goes down, his futures position starts making profit. If the index rises, his
futures start showing losses. Discuss.
9. Write down the various types of future contracts.

Answers: Self Assessment

1. Futures 2. Delivery
3. Organised exchanges 4. Margins

5. Short, long 6. True
7. False 8. True
9. Spot Price 10. Expiry Date
11. Basis 12. Stock index

13. International Monetary Market (IMM) 14. Cash index
15. Badla

4.8 Further Readings

Books Anderson, R W and K McKay (2008): Derivatives Markets, in Freixas, X, P
Hartmann and C Mayer (eds), Handbook of European Financial Markets and
Institutions, Oxford University Press, Oxford, UK.
Apte, P.G., International Financial Management, Tata McGraw-Hill Publishing
Chance, Don M. An Introduction to Derivatives, Dryden Press, International
Edition

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