Page 42 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Rupesh Roshan Singh, Lovely Professional University
Unit 4: Future Contracts

Unit 4: Future Contracts Notes

CONTENTS
Objectives
Introduction
4.1 Introduction to Futures

4.1.1 Nature of Future Contracts
4.1.2 Characteristics of Futures Contracts
4.2 Types of Future Contracts

4.2.1 Stock Index Futures
4.2.2 Commodity Futures
4.2.3 Currency Futures
4.3 Distinction between Future and Forward Contracts
4.4 Pay-Offs

4.4.1 Payoff for Buyer of Futures: Long Futures
4.4.2 Payoff for Seller of Futures: Short Futures
4.5 Cash Settlement vs Physical Settlement

4.6 Summary
4.7 Keywords
4.8 Review Questions
4.9 Further Readings

Objectives

After studying this unit, you will be able to:

 Define futures
 Explain stock index futures, commodity futures and currency futures
 Make distinction between futures and forward contracts

 Describe pay-offs
 Compare cash settlement vs physical settlement

Introduction

After explaining the forwards contracts in previous unit, let us now discuss the futures contacts.
Unlike forwards contracts, futures are standardized contracts traded on
exchanges through a clearing house and avoid counter party risk through margin money, and
much more.
What we know as the futures market of today originated from some humble beginnings. Trading
in futures originated in Japan during the eighteenth century and was primarily used for the

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