Futures And Options General Information » Soved (2024)

Equity derivatives are financial instruments whose value is derived from underlying equity securities, such as stocks. They include a wide range of products, such as stock options, stock futures, stock index futures, and other exotic derivatives.

Equity derivatives allow market participants to hedge their exposure to underlying equity securities, speculate on the future price movements of those securities, and generate additional income through trading strategies that use the underlying securities.

They also provide an alternative way for investors to gain exposure to the stock market, as they allow market participants to trade on the price movements of a stock or stock index without having to actually own the underlying securities.

Overall, equity derivatives provide a flexible and versatile tool for managing risk, generating returns, and gaining exposure to the equity markets.

Futures and options are financial derivatives that allow traders to speculate on the future price movements of underlying assets such as stocks, commodities, currencies, and indexes.

A futures contract is an agreement to buy or sell an underlying asset at a predetermined price on a future date. Futures are typically used for hedging or speculating on price movements.

An option is a contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specified date. Options are typically used for hedging or speculating on price movements, and provide the holder with more flexibility than a futures contract.

Both futures and options can be traded on exchanges and are used by a variety of market participants, including individual investors, hedge funds, and large financial institutions.

Underlying assets refer to the assets that serve as the basis for the value of a financial derivative, such as a futures contract, option, or swap. The underlying asset can be a physical commodity, such as gold or oil, a financial security, such as a stock or bond, an index, such as the Nifty 50, or a currency, such as the US dollar.

The price movements of the underlying asset directly impact the value of the derivative, which is why derivatives are often used to speculate on the future price movements of underlying assets or to hedge against potential price movements.

For example, in a stock option, the underlying asset is the stock, and the option’s price is based on the future price movements of the stock. In a commodity futures contract, the underlying asset is the commodity, and the contract’s price is based on the future price movements of the commodity.

Types of underlying assets:

Underlying assets can be broadly categorized into five main types:

• Equity index and equity shares
• Currency
• Commodity- Gold, Silver, Wheat, etc.
• Interest rate
• Crude oil, Natural Gas, Coal, etc.

Each of these underlying assets has its own unique characteristics and can be used as the basis for a wide range of derivative products, such as options, futures, swaps, and exchange-traded funds (ETFs).

Types of derivative product:

There are several types of derivative products-

• Forwards
• Futures
• Options
• Warrants
• Leaps
• Baskets
• Swaps
• Swaptions

Derivative product brief definition:

Forwards:

A forward contract is a customized contract between two entities where settlement takes place on a specific date in the future at today’s pre-agreed price.

Futures:

A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. futures contracts are special type of forward contracts in the sense that the former are standardized exchange-traded contracts.

Options:

Options are of two types- call and puts. calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset at a given price on or before a given future date. puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.

Warrants:

Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. longer dated options are called warrants.

Leaps:

The acronym leaps means long term equity anticipation securities. these are options having a maturity of up to three years.

Baskets:

Basket options are options on portfolios of underlying asset is usually a moving average of a basket of assets. equity index options are a form of basket options.

Swaps:

Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. they can be regarded as portfolios of forward contracts. the two commonly used swaps are-

1.Interest rate swaps-These entail swapping only the interest related cash flows between the parties in the same currency.

2.Currency swaps– These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.

Swaptions:

Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. thus a swaption is an option on a forward swap. rather than have calls and puts the swaptions market has receiver swaptions and payer swaptions. a receiver swaptions is an option to receive fixed and pay floating. a payer swaption is an option to pay fixed and receive floating.

Each of these derivative products serves a specific purpose and can be used in different ways, depending on the investor’s objectives and risk tolerance.

There are generally three types of market participants available in the derivative markets known as Hedgers, Speculators or Traders, and Arbitrageurs. Brief definition about derivative participants written below-

1.Hedgers:

Trades in the derivative market hedgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk.

2.Speculators:

Speculators wish to bet on futures movement in the price of an asset. Futures and options contracts can give them an extra leverage, that is they can increase both the potential gains and potential losses in a speculative venture.

3.Arbitrageurs:

Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If for example they see the futures price of an asset getting out of line with the cash price they will take offsetting positions in the two markets to lock in a profit.

Each of these participants plays a unique role in the derivatives markets and contributes to the functioning and stability of these markets.

• 12^thcentury-in European trade fairs seller signed contracts promising future delivery of the items they sold.
• 13^thcentury-there are many examples of contracts into by English Cistercian monasteries, who frequently sold their wool up to 20years in advance to foreign merchants.
• 1634-1637 Tulip Mania in Holland fortunes were lost in after a speculative boom in tulip futures burst.
• Late 17^thcentury- in Japan at Dojima, near Osaka a futures market in rice was developed to protect rice producers from bad weather or warfare.
• In 1848, the Chicago board of trade (CBOT) facilitated trading of forward contracts on various commodities.
• In 1865, the CBOT went a step further and listed the first exchange traded derivative contracts in the us. These contracts were called futures contracts.
• In 1919 Chicago butter and egg board, a spin-off of CBOT, was reorganized to allow futures trading later its name was changed to Chicago mercantile exchange (CME).
• In 1972, Chicago mercantile exchange introduced international monetary marker (IMM), which allowed trading in currency futures.
• In 1973, Chicago board options exchange (CBOE) became the first market place for trading listed options.
• In 1975, CBOT introduced treasury bill futures contract. It was the first successful pure interest rate futures.
• In 1977, CBOT introduced t-bond futures contract.
• In 1982, CME introduced Eurodollar futures contract.
• In 1982, Kansas city board of trade launched the first stock index futures.
• In 1983, Chicago board options exchange (CBOE) introduced option on stock indexes with the S&P 100 (OEX) and S&P 500 (SPXSM) indexes.
• Other popular international exchange that trade derivatives are LIFFE in England, DTB in Germany, SGX in Singapore, TIFFE in Japan, MATIF in France, EUREX in Eschborn Germany.

The exchange traded derivatives started in India in June, 2000 with SEBI permitting BSE and NSE to introduce equity derivative segment. To begin with SEBI approved trading in index futures contracts based on CNX Nifty and BSE Sensex, which commenced trading in June, 2000.

Later trading in index options commenced in June, 2001 and trading in options on individual stocks commenced in July, 2001.

Futures contracts on individual stocks started in November 2001.

MCX-SX (renamed as MSEI) started trading in all these products like futures and options on index SX40 and individual stocks in February, 2013.

Derivatives markets can be either organized, where trading takes place on a regulated exchange, or over-the-counter (OTC), where trading takes place directly between two parties without the involvement of an exchange. Both organized and OTC derivatives markets have their own advantages and disadvantages, and the choice between the two will depend on a number of factors, such as the size of the trade, the nature of the underlying asset, and the specific needs of the buyer and seller.

Exchange traded markets/Electronic markets:

Traditionally derivatives exchanges known as the ‘open outcry system’. In this system traders present physically on exchange for trading and here using hand pose of signals with shout to indicate buy or sell trade. Now exchanges have largely replaced the open outcry system by electronic trading or exchange traded. Electronic trading has led to a growth in high frequency and algorithmic trading. This involves the use of computer programs to initiate trades, after without human intervention, and has become an important feature of derivatives market.

Over the counter markets:

Over the counter derivative contracts are trading between two parties without platform of a stock exchange or any other intermediary. Banks, other large financial institutions, fund managers, and corporations are the main participants in OTC derivative markets. Once an OTC trade has been agreed, the two parties can either present it to a central counterparty (CCP) or clear the trade bilaterally. A CCP is like an exchange clearing house. It stands between the two parties to the derivative transaction so that one party does not have to bear the risk that the other party will default.

Traditionally participants in the derivatives market have contacted each other directly by phone and email, or have found counterparties for their trades using an interdealer broker.

Market participants must understand that derivatives being leveraged instruments, have risks like-

Counterparty risk– default by counterparty.

Price risk– loss on position because of price move.

Liquidity risk– inability to exit from a position.

Legal or regulatory risk– enforceability of contracts.

Operational risk– fraud, inadequate documentation, improper execution etc.

Market participants who trade in derivatives are advised to carefully read the model risk disclosure document given by the broker to his clients at the time of signing agreement.

Model risk disclosure document is issued by the member of exchanges and contains important information on trading in equities and F&O segments of exchange.

Globally– the global financial derivatives markets are estimated to be over 2830trillion us dollar for the year 2021based on the yearly turnover on notional value basis.

(Source- world federation of exchange)

National-in India the total turnover in exchange traded equity derivatives markets stand at over Rs. 16952lakh crore on the basis of notional value of the contracts for the FY2021-22.

(Source- national stock exchange)

A forward contract is a type of derivative contract that obligates the buyer to purchase an underlying asset at a predetermined price on a future date. The buyer and the seller of a forward contract agree on the terms of the contract, including the price and delivery date, at the time the contract is entered into.

The forward contract is the simplest form of derivative. Consider the forward contract as the older form of future contract. Both the futures and forwards contract share a common transactional structure. The forward contracts still in use but by some participants such as banks and industries.

One of the key differences between a forward contract and other types of derivatives, such as futures and options, is that forward contracts are typically traded over-the-counter (OTC) rather than on an organized exchange. This means that forward contracts are customized to meet the specific needs of the buyer and seller, and are not subject to the same level of standardization and regulation as organized exchange-traded derivatives.

Global OTC derivative market by bank of international settlements source:

source-https://www.bis.org/statistics/derstats.htm?m=2071https://www.bis.org/statistics

OTC derivative one snap shot-

Forward example:

MR. A….(trader) <==> FORWARD CONTRACT<==>MR. B……(asset owner)

Mr. B… Perspective– Mr. B is thinking that today is crop seeding after 3 months crop will be ready but today is wheat price Rs. 50/kg and wheat production cost is Rs. 40/kg then price will go down more than Rs. 40 then loss happen. So he wants to make a contract to protect his loss so he is searching person who is make contract today in behalf of wheat price Rs. 50/kg for quantity-1000kg for 3month period from today. So he wants a trader who buy his asset on todays price.

Mr. A… Perspective– Mr. A has just opposite perspective from Mr. B Mr. A thinking that wheat price go up after 3 months due to rise of wheat demand by marriage so he also wants to make contract. Fortunately both are mingled and make contract at a price Rs. 50/kg on todays date for after three months buy and sell wheat on price Rs. 50/kg for 1000kg quantity.

After 3 months 3 scenario will arise-

1.Wheat price after 3 months same as contract Rs. 50/kg

2.Wheat price after 3 months increase more than contract price Rs.60/kg

3.Wheat price after 3 months decrease less than contract price Rs.40/kg

1 Scenario– in first scenario neither trader nor asset owner are in profit/loss. Contract is neutral.

2 Scenario– in second scenario wheat price after 3 months goes up at the price of Rs 60/kg so buyer(trader) makes profit Rs 10/kg and seller(asset owner) loss Rs 10/kg.

3 Scenario– in third scenario wheat price after 3 months goes down by rs40/kg so in settlement trader make loss Rs 10/kg and asset owner make profit Rs 10/kg.

Types of forward contract settlement:

Physical settlement– the full purchase price is paid by the buyer of a forward contract and the actual asset is delivered by the seller. Above example Mr. A is buyer and Mr. A buys 1mt of wheat to pay Mr. B a payment of Rs.50000/- at the rate of Rs 50/kg and Mr. B deliver the 1mt wheat to Mr. A if Mr. B according to scenario 2 don’t hold any asset or crop is ruined then due to honor of contract Mr. B buy the wheat from open market 1mt at the total price of Rs 60000/- at the current rate of wheat and deliver of wheat to Mr. A it is physical settlement.

Cash settlement– in a cash settlement there is no physical delivery of any asset and no any payment to done. In cash settlement the buyer and seller will simply exchange the cash difference as per the agreement according to scenario 2 Mr. A buy 1mt wheat at the rate of Rs 50/kg which is total price is Rs 50000/- but Mr. B pay to equivalent 1mt wheat price at current rate of wheat who is Rs 60/kg so 1mt wheat total price is Rs 60000/- so the two parties can agree to exchange only the cash differential in this case it would be Rs 10000/-(60000-50000=10000) hence Mr. B would just pay Rs 10000/- to Mr. A and settle the deal. This is called a cash settlement.

What about the forward contract risk:

Do note, the risk are not just with price movements, there are other major drawbacks in a forward contract and they are-

1.Liquidity risk-in our example we have conveniently assumed that, Mr. B with a certain view on wheat find a party Mr. A who has an exact opposite view hence they easily strike a deal. In the real world this is not so easy in a real life situation the parties would approach an investment bank and discuss their intention the investment bank would scout the market to find a party who has an opposite view oncourse, the investment bank does this for a fee.

2.Default risk/counterparty risk– consider this assume the wheat price have reached Rs 60/kg at the end of 3 months Mr. A would feel proud about the financial decision they had taken 3 months ago they are expecting Mr. B to pay up. But what if Mr. B defaults?

3.Regulatory risk-the forwards contract agreement is executed by a mutual consent of the parties involved and there is no regulatory authority governing the agreement. In the absence of a regulatory authority a sense of lawlessness creeps in which in turn increase the incentive to default.

4.Rigidity-both Mr. B and Mr. A entered in to this agreement on 1^stdate of first month with a certain view on wheat. However what would happen if their view would strongly change when they are halfway through the agreement the rigidity of the forward agreement is such that they can not foreclose the agreement half way through.

The forward contracts have a few disadvantages and hence future contracts were designed to reduce the risks of the forward agreements.

Key summary points for forward contract:

1.For forward contract minimum two persons required in opposite views to make contract.

2.Any underlying asset required which price movement happen.

3.Price movement reason required.

4.Mutual consent between two parties for particular time period and for quantity with quality.

5.Forward contract is private agreement so terms vary one contract to others.

6.Who buy the underlying asset called buyer of the forward contract and who sell the underlying asset called seller of the forward contract.

7.Forward contract settlement done by two way physical and cash.

Why all stocks or index are not eligible for futures trading:

Only those stocks which meet the criteria on liquidity and volume and which are proposed by stock exchanges and approved by SEBI based on such criteria, are made available for trading in derivatives segment.

Eligibility criteria for new & existing F&O stocks:

Futures and options contracts may be introduced on new securities which meet the below mentioned eligibility criteria. Subject to approval by SEBI.

1.The stock shall be chosen from amongst the top 500 stocks in terms of average daily traded value in the previous six months on a rolling basis.

2.The stocks median quarter-sigma order size over the last six months shall be not less than Rs. 25lakhs.

3.The market wide position limit in the stock shall not be less than Rs. 500crores on A rolling basis

4.The average daily delivery value in cash market shall not be less than Rs. 10crores in the previous six months on A rolling basis.

5.If an existing security fails to meet aforesaid continued eligibility criteria for three months consecutively, then no fresh month contract shall be issued on that security. However the existing unexpired contracts may be permitted to trade till expiry and new strikes may also be introduced in the existing contract months.

Reintroduction of excluded stocks:

A stock which is excluded from derivatives trading may become eligible once again. In such instances, the stock is required to fulfill the enhanced eligibility criteria for six consecutive months to be reintroduced for derivatives trading.

Eligibility criteria of indices:

The futures and options contracts on an index can be introduced only if the stocks contributing to 80% weightage of the index are individually eligible for derivative trading however no single ineligible stocks in the index shall have a weightage or more than 5% in the index. The above criteria is applied every months. If the index fails to meet the eligibility criteria for three months consecutively, then no fresh month contract shall be issued on that index , however, the existing unexpired contracts shall be permitted to trade till expiry and new strikes may also be introduced in the existing contracts.

Investor can trade the maximum part of stock market by buying index futures instead of buying individual stock futures with the efficiency of A risk diversification some advantages of trading in index futures in comparison stock futures-

• The contracts are highly liquid.
• Index futures provide higher leverage than any other stocks.
• It has lower risk than stock futures.
• Easy to trade long side and short side.
• Study on index movement which one depend more than one stocks but in stock futures only study in one stocks.
• Index less volatile than single stocks.
• Some cases we can use index futures as a hedge for a portfolio exposure with correlation between index and portfolio.
• Diversified, hard to manipulate, lesser margin, broader economic call, application of technical analysis.

There are three major players in derivatives market- hedgers, traders, and arbitrageurs. Hedgers are there to hedge their risk, traders take the risk which hedgers plan to offload from their exposure and arbitragers establish an efficient link between different market.

Hedging:

One of the most important and practical applications of futures is hedging. In the event of any adverse market movements, hedging is A simple work around to protect your trading positions from making A loss. Corporations, investing institutions, banks and governments all use derivative products to hedge or reduce their exposures to market variable such as interest rates, share values, bond prices, currency exchange rates, and commodity prices.

Why Hedge:

If we have taken position in spot market then why we have hedge it if market down then we will hold it and always market go up in long time I think not required.

Example– suppose that you have buy stock for Rs. 100000/- and market crash 50% down then portfolio value after crash Rs. 50000/- now if we hold for long time recovery will happen when market rise 100% means now our portfolio go up (100000-50000)*100/50000=100% then I will recover as same portfolio.

Here are three conditions available:

• First is hold till portfolio will not come same value. Its time taken less the portfolio value growth.
• 2^ndis I will sell it before crash and buy it after crash and prevent by loss it is perfect method but time to market is very difficult and also burden of tax, broker charge, transaction charges etc.
• 3^rdis hedge it by futures or by options we will discuss in this section about it.

Risk:

price movement of assets against our value called as A risk so we are hedging the risk but what kind of risk?

When you buy the stock of a company you are essentially exposed to risk in fact there are two types of risk-

1.Specific risk or unsystematic risk

2.Market risk or systematic risk

When you buy A stock or A stock future you are automatically exposed to both these risks.

Unsystematic risk:

The stock can decline for many reasons, reasons such as-

1.Declining revenue.

2.Declining profit margins.

3.Higher financing cost.

4.High leverage.

5.Management misconduct.

All these reasons represent A form of risk, some other reasons are also available. However if you notice, there is one thing common to all these risks- they are all company specific risk. Means if you buy A stock RIL and after quarter their revenue have declined then RIL price also decline but their competitors are price not decline like this if any company management found guilty then that company stock price will down but not others company. Such risks are often called the “unsystematic risk” now eliminate this type of risk we have to diversify portfolio stocks along with diversify of sectors and industries. If you buy RIL and axis bank then RIL decline that not means axis bank also decline so diversify more than one stock like 5 stock, 10 stock, 20 stock portfolio higher the no. Of stocks in your portfolio lesser the unsystematic risk.But how many no. Of maximum stocks portfolio to best diversify for unsystematic risk?Research has it that up to 21 stocks in the portfolio will have the required necessary diversification effect and anything beyond 21 stocks may not help much more in diversification.

Systematic risk:

After unsystematic risk diversification remain risks called as a “systematic risk”. Systematic risk is the risk that is common to all stocks. These are usually the macroeconomic risks which tend to affect the whole market. Systematic risk include-

1.Degrowth in GDP.

2.Interest rate tightening.

3.Inflation.

4.Fiscal deficit.

5.Geo political risk.

Systematic risk affects all stocks. So assuming you have a well diversified 20 stocks portfolio, a degrowth in GDP will certainly affect all 20 stocks and hence they are all likely to decline. Systematic risk is inherent in the system and it can not really be diversified. However systematic risk can be “hedged”.

Remember we diversify to minimize unsystematic risk and we hedge to minimize systematic risk.

Understanding Beta:

Beta measures the sensitivity of the stock price with respect to the changes in the market, which means it helps us answer these kinds of questions-

1.If market moves up by 2%, what is the likely movement in stock-xyz?

2.How risky or volatile stock-xyz compared to market indices?

3.How risky is stock-xyz compared to stock-abc?

The beta of a stock can take any value greater or lower than zero. However the beta of the market indices ( Sensex, Nifty ) is always +1. For example assume beta of stock-xyz is +0.7, the following things are implied-

1.For every +1% increase in market, stock-xyz is expected to move up by 0.7%. If market up 1.5% the stock-xyz move up 1.05% if market down 1% the stock down 0.7%.

2.Because stock-xyz beta less than market beta it means stock-xyz less risky than markets means less systematic risk.

3.Assume stock-abc, beta is +0.9, then stock-xyz less volatile compared to stock-abc means less risky.

Beta value interpretation:

Beta value calculation method:

1.Download last 6 months daily close price of nifty and stock-xyz from NSE website are related website.

2.Calculate daily return of both nifty and stock-xyz

Daily return= (today closing price/previous day closing price)-1

3.Calculate the average daily return of nifty and stock-xyz

4.Now equate the nifty beta +1 to stock-xyz beta.

Suppose, average daily return of Nifty=1.18%

Average daily return of stock-xyz=1.3%

Now, beta of stock-xyz=1.3%/1.18%=1.1016~1.1

Hedging A single stock and A stock portfolio:

If you have taken investment in spot market in RIL 5lakh rupees now you have to protect (hedge) it by market risk. Now you have to short it in futures market but some issues are here-

1.Spot portfolio value= Rs 5lakh

Futures contract (1lot) value=lot size*future price

=250*2400=Rs 6lakh

If we sell 1lot then it will over hedge if stock total value more than futures contract value like as 8lakh then under hedge for it issue can we resolve by futures hedge?

2. If stock-xyz futures contract not available then what to do. Now for it we can use another competitor stock for hedge which one is available in futures market but here is unsystematic risk for both its not A good way.

3. Can I hedge by index yes but stock-xyz still has unsystematic risk so go un directional move any time its also not A good way.

4. For that first create A diversified portfolio to reduce unsystematic risk and now only remain systematic risk for that you hedge it now by index futures but you have to calculate beta value of your portfolio-

Portfolio beta-

Weightage in portfolio stock-a =200000*100/800000=25%

Weighted beta stock-a=1.2*25/100=0.3

Portfolio beta= add weighted beta of all portfolio stocks

So portfolio beta is=1.187

Hedge value= portfolio beta*portfolio value

=1.187*800000

=9,49600/-

Nifty 50 index future price=15000/-

Lot size-50

Nifty contract value=50*15000=750000/-

No. Of lots required to short nifty=949600/750000=1.266 lot

Now we can short 1lot or 2lot if short 1lot means slightly under hedged if short 2lot we would be over hedged in fact for this reason, we can not always perfectly hedge A portfolio.

After hedging stock portfolio will go up or down we can lock for any profit or loss.

Suppose that nifty down 5%, then portfolio down by=1.187*5%=5.935%

In portfolio make loss due to long=800000*5.935/100=47480/-

In future make profit due to short=750000*1.266*5/100=47475/-

Now, we offset portfolio loss by futures hedge so we have not done any loss during market crash due to portfolio hedging but come out from hedging when market crash or fall end.

Beta value source and snapshot:

SOURCE-https://www1.nseindia.com/products/content/equities/indices/archieve_indices.htm

Important terms in hedging:

Long hedge– long hedge is the transaction when we hedge our position in cash market by going long in futures market. Example from the commodity market, if there is A flour mill and it is expecting the price of wheat to go up in near future. It may buy wheat in forwards/futures market and protect itself against the upward movement in price of wheat.

Short hedge– short hedge is a transaction when the hedge is accomplished by going short in futures market. Example for protect portfolio from loss of market crash are short in futures market to protect fall type of short hedge.

Hedge contract month– hedge contract month is the maturity month of the contract through which we hedge our position. For instance, if we use xyz Jan 2023 fut for hedge so hedge contract month would be Jan 2023.

Cross hedge– when futures contract on an asset is not available market participants look forward to an asset that is closely associated with their underlying and trades in the futures market of that closely associated asset for hedging purpose. They may trade in futures in this asset to protect the value of their asset in cash market this is called cross hedge.

For instance, if futures contract on jet fuel are not available in the international markets then hedgers may use contracts available on other energy products like crude oil, heating oil or gasoline due to their close association with jet fuel for hedging purpose. This example of cross hedge.

When we are using index futures to hedge against the market risk on a portfolio using a cross hedge because of different underlying asset.

Trading in futures market (Trader):

Traders are risk takers in the derivatives markets and they take positions in the futures market without having positions in the underlying in cash market /capital market/equity market . these positions are based upon their expectations on price movement of underlying asset. Traders either take naked position is long or short in any of the futures contracts (index or stock future contract) but in case of spread, two opposite positions (one long and one short) are taken either in two contracts with same maturity on different products or in two contracts with different maturities on the same product former is inter-commodity or inter-product spread and latter is calendar spread/time spread or horizontal spread at present in equity market, the system recognizes only calendar spreads. In commodities market system recognizes inter-commodity spread between specific commodities like gold and silver, soybean, soybean meal and soybean oil etc.

Arbitrage opportunities in futures market (Arbitrager):

Arbitrage is simultaneous purchase and sale of an asset or replicating asset in the market in an attempt to profit from discrepancies in their prices arbitrage involves activity on one or several instruments/ assets in one or different markets, simultaneously the objective of arbitragers is to make pr0fits without taking risks, but the complexity of activity is such that it may result in losses as well.

Arbitrage in the futures market can typically be of three types-

1.Cash and carry arbitrage-cash and carry arbitrage refers to A long position in the cash or underlying market and A short position in futures market.

2.Reverse cash and carry arbitrage-reverse cash and carry arbitrage refers to long position in futures market and short position in the underlying or cash market.

3.Inter-exchange arbitrage-this arbitrage entails two positions on the same contract in two different markets/exchange.

Above two method example I have discussed in future pricing formula session but inter exchange arbitrage are a example-

Suppose stock-abc price on NSE- Rs 10/-

And stock-abc price on BSE- Rs 12/-

Then we can benefit=12-10=Rs 2/- with buy in NSE and sell in BSE but fact is not correct some brokerage, transaction cost also imply so calculate first, this type of arbitrage opportunity.

Open interest (OI) is A number that tells you how many futures or options contracts are currently outstanding (open) in the market. Remember that there are always 2 sides to A trader- A buyer and A seller. Let us say seller sell one contract to the buyer. The buyer is said to be long on the contract and the seller is said to be short on the same contract the open interest in this case is said to be 1.

Open interest information tells us how many contracts are open and live in the market volume on the other hand tells us how many trades were executed on the given day. For every 1buy and 1sell , volume adds up to 1. Hence the volume data always increases on A intraday basis. However, oi not discrete like volumes, oi stacks up or reduces based on the entry and exit of traders.

Tables of trader’s perception-Table1

Tables of trader’s perception-Table2

Note-Demand is equivalent buying quantity and supply is equivalent to selling quantity.