M

CERTIFICATE
THIS IS TO CERTIFY THAT SHRI / KUM. ________ _________________________________ OF ___________ ROLL NO. _____ HAS COMPLETED THE PROJECT ASSIGNED TO HIM / HER SATISFACTORILY, AND HAS BEEN AWARDED ________________ MARKS.

DATE: ________________

(TEACHER IN-CHARGE)

GROUP MEMBERS

Rohan Malusare Flavia Fernandes Priyanka Gawde Dinesh Hadkar Sarika Jadhav Jitesh Jain

13 14 15 16 17 18

SEGMENTS OF CAPITAL MARKET

NSE has the following major segments of the capital market:

1. 2. 3. 4. 5. 6. 7.

Equity Futures and Options Retail Debt Market Wholesale Debt Market currency Futures Mutual Funds Stocks Lending and Borrowing

ORIGIN
Futures were originally introduced as an insurance mechanism for farmers and manufacturers who wanted to fix a price for crops at a future date. However slowly the concept was adopted in the financial products. The financial transactions and asset liability positions of the traders are exposed to price risk. The price may fluctuate due to change in exchange rate, interest and market conditions. This has led to emergence of currency futures, interest rate futures and commodity futures. The first futures exchange market the Dojima Rice Exchange in Japan in 1930s.

FUTURES
A futures contract is a contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a predetermined price in the future. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. A futures contract calls for the delivery of either a physical asset or a

financial instrument at a specified date at an agreed-upon price. In a futures contract a person pledges to buy or sell a particular commodity at a particular price on a particular day. If X buys a futures contract, he is obligated to buy the commodity at the stated price. On the other hand, if X sells such futures, he is obligated to sell the commodity at the stated price. The terms of the futures contract are specified in detail. The contract includes: a) The type and quantity of asset or set of assets must be indicated precisely. b) The contract should mention the date of maturity or the period at which the exchange is to be completed. c) The contract should also specify the exact place and process of delivery.

FEATURES OF FUTURES CONTRACT:Futures are similar to forwards in the sense that the price is decided today and the delivery will take place in future. But futures are quoted on a stock exchange. Prices are available to all those who want to buy or sell because the trading takes place on a transparent computer system. The essential features of a futures contract are:

i. ii. iii.

Contract between two parties through an exchange Exchange is the legal counterparty to both parties Price decided today

iv. v. vi. vii. viii. ix.

Quantity decided today (quantities have to be in standard denominations specified by the exchange) Quantity decided today (quantities should be as per the specifications decided by the exchange) Tick size(i.e. the minimum amount by which the price quoted can change ) is decided by the exchange Delivery will take place sometime in future (expiry date is specified by the exchange) Margins are payable by both the parties to the exchange In some cases, the price limits (or circuit filters can be decided by the exchange

A future contract is customizable in terms of contract size, expiry date and price, as per the needs of the user. A futures markets are regulated by the regulatory agencies. Some of the key features of futures market are: a) Futures are traded in organized exchanges. b) Futures contract are of a standardized size. c) Clearing houses guarantee that all the traders in futures market will honour their obligations. d) Margin payment and daily settlement is required. e) Future positions are closed easily.

PLAYERS There are two main types of future traders in a futures market: a) Hedgers: hedgers are individuals and firms that makes purchase and sells in the future market solely for the purpose of establishing a known price level- weeks or months in advancefor something later they intended to bye and sell in the cash market in this way they attempt to prevent themselves against the risk of unfavorable price change in the interim. Hedgers may use futures to lock in an acceptable margin between their purchase price and their selling price. b) Speculators: Speculators are individuals and firms investors who accept the risk. In other words the speculators are individuals and firms who seek to profit from anticipated increase or decrease in future price. Someone who expects a future price to increase would purchase future contracts in the hope later being able to sale them in higher price, this is known as going long, while on the other hand someone who expects future price decline would sell future contracts in hope of later being able to buy back identical and offsetting contacts at lower price , the practice of selling futures contracts in anticipation of lower price is known as going short. Most of the speculative investor have no intention of making or taking delivery of the commodity but, rather seek to profit from a change in the price . c) Floor traders: Floor traders are person who buy and sell for their own accounts on the trading floors of the exchange and are the least known and understood of all futures market participants ,Actually they have no guarantee they will realize a profit , they can loss of money on any trade, basically the floor trader make more liquid and competitive market

NEED FOR FUTURES TRADING Futures trading in commodities results in and fair price discovery on account of large-scale participations of entities associated with different value chains. It reflects views and expectations of a wider section of people related to a particular commodity. It also provides effective platform for price risk management for all segments of players ranging from producers, traders and processors to exporters/importers and end-users of a commodity. It also provides hedging, trading and arbitrage opportunities to market players Types of Futures Contract There are two broad types of futures contract, viz Commodity Futures and Financial Futures. Commodity futures can further be classified as: Energies: The first in our list has been very active in recent times. This one features many different products that provide energy to heat and power homes as well as businesses. This includes petroleum, byproducts of petroleum, crude oil, heating oil, propane, natural gas and even coal. In this section of kinds of commodities there is a minimum price that is set by the exchange. There is also a standard contract size, which is the amount covered by the futures contract. b) Grains: The second one on the list of commodity type is grains. In this category the commodities features wheat, rice, corn, oat and soybean. It can also include certain agricultural products as well. The Chicago Board of Trade (CBOT) is engaged with these types of commodities quite a bit. These are stored for
a)

future trading. They always come bound with a predefined, but minimum contract size. c) Livestock: Meat is yet another famous commodity type which includes live cattle, pork lean hogs and bellies. This is basically exchanged on the Kansas City Board of Trade or KCBT. This is in fact where primarily, livestock have been traded. The commodity appears to be less volatile than others. A number of times this specific commodity type is dependent on grain also, as the grain feeds most of the livestock. d) Metals: The major metals futures contracts include copper, gold, platinum, palladium and silver. Their uses include industrial purposes, in construction, and for jewelry. In the copper market, building construction is the largest demand source. Copper is also used for electrical and electronic products, transportation and industrial machinery manufacturing. The price of copper is therefore sensitive to statistics related to economic growth, particularly reports such as housing starts. Gold has also been used as an hedge against political and economic uncertainties and many central banks back their currency with gold reserves. Financial Futures can be classified as: Currency Futures: Currency futures are futures markets where the underlying commodity is a currency exchange rate, such as the Euro to US Dollar exchange rate, or the British Pound to US Dollar exchange rate. Currency futures are essentially the same as all other futures markets (index and commodity futures markets), and are traded in exactly the same way. b) Interest Rate Futures: An interest rate future is a financial derivative. For the uninitiated, a derivative is a financial contract the value of which is 'derived' from a long-standing security such as a stock or a bond, or even an asset, or a market index. So an interest rate future is a financial derivate based on

an underlying security, actually a debt obligation that moves in value as interest rates change. That is, buying an interest rate futures contract will allow the buyer to lock in a future investment rate. When the interest rates scale up, the buyer will pay the seller of the futures contract an amount equal to the profit expected when investing at a higher rate against the rate mentioned in the futures contract. On the flip side when the interest rates go down, the seller will pay off the buyer for the poorer interest rate when the futures contract expires. According to experts, the interest rate futures market had priced the futures so that there is sparse room for arbitrage. c) Stocks Futures: Stock Futures are financial contracts where the underlying asset is an individual stock. Stock Future contract is an agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller. The contracts have standardized specifications like market lot, expiry day, and unit of price quotation, tick size and method of settlement. ADVANTAGES OF FUTURES TRADING a) Fast profits or earnings: In case of futures trading, the probability of an investor to earn in less time is more. The reason is that futures market is faster than cash markets. Now, as it is an investment there is risk involved. If a person can earn quickly here, it also means that if the speculation is incorrect then the chances of that person loosing money also occurs fast. One can though minimise the losses by opting for Stop loss order. b) Fairer than other markets: As compared to other stock and share markets. Futures market is considered to be fairer. The reason is that it is difficult to get inside information here. Hence, all the dealing are transparent and fair. Apart from this, there is a

market report which is released at the end of the trading session. This helps the investors to read and study. c) Liquid Market: Everyday, there are numerous contracts traded in this case. This results in maintaining good liquidity in the market. More and more people are opting for this trading as market orders can be booked in a quick manner as there are always people to buy or sell the commodities. This also results in a much more stable market as prices can not suddenly jump or fall as transactions happen all the time. d) Small commission charges: Another saving for investors is that the commission charges are less as compared with other types of investments. It basically is not a straight forward commission. Commission depends on the kind of service given by the broker. In fact, online trading commission in case of futures trading can be as low as $5 only. DISADVANTAGES OF FUTURES TRADING Danger of Leverage: Futures contracts can be bought or sold with a margin deposit that is typically 5 to 10 percent of the contract value. This means that futures provide a leverage ratio of from 10-to-1 to 20-to-1 on the price movement of the underlying commodity or instrument. If a trader picks the wrong direction for a futures contract, he can lose a large portion or all of the margin deposit in a very short time. The high level of leverage offered by futures trading is a doubleedged sword, and the trader must be able to monitor her trades at all times and be ready to close the trades before losses get too large.

Complicated Products: Futures contracts are complicated and can

be difficult for new traders to understand. Each contract has a different size and different price movement amounts. For example, a corn contract is for 5,000 bushels of corn and one tick in price change is worth $12.50; crude oil is for 1,000 barrels and a tick is $10; 10-year Treasury note contracts are for $100,000 and a tick is worth $15.625. Traders also have to understand final trading dates and possible delivery options. Futures are also traded only with brokers that are registered with the Commodity Futures Trading Commission, and cannot be traded with regular stock brokers. Price Limits: Many commodities have a daily limit on how much the price can change. If a commodity value is changing rapidly, it will quickly reach the limit price each day and traders will not be able to continue trading. A futures trader who is caught on the wrong side of a trade making limit moves every day may be stuck in the contract with few options to stop the losses. Large Margin Deposit for New Traders: Futures contracts are for large amounts of the underlying commodity or instrument. Even though the margin requirement is a small percentage of the contract value, the dollar amount can be large for new investors. For example, the margin deposit on a S&P 500 contract is $28,125. Even the e-mini S&P 500 contract requires an initial deposit of $5,625. These amounts can be too large for the new trader trying to learn futures trading.

Large Margin Deposit for New Traders: Futures contracts are for large amounts of the underlying commodity or instrument. Even though the margin requirement is a small percentage of the contract value, the dollar amount can be large for new investors. For example, the margin deposit on a S&P 500 contract is $28,125. Even the e-mini S&P 500 contract requires an initial deposit of $5,625. These amounts can be too large for the new trader trying to learn futures trading. ELIGIBILITY FOR TRADING MEMBERS Member or brokers are eligible to trade the futures contract in exchange subject to Certain condition. These are: a. Members have to pay an approval fees as prescribed by the exchange from time to time
b.

They have to be registered with SEBI in additional to their registration with any of the exchanges.

c. Members have to pass a certification programme which has been approved by the SEBI
d.

The trading members is required to deposit security either in the form of cash deposits , receipts , bank guaranty of an approved bankers or others , subject to the condition as the exchange may specify from time to time . The members should have a minimum security net worth as many be prescribed by the exchange from time to time.

e.

Regulations

The futures market is regulated in the United States by the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), The National Futures Association (NFA) and by the exchanges themselves. The CFTC, created by the Commodity Futures Trading Commission Act of 1974, is a federal agency that regulates all futures trading in the United States, and oversees the NFA. The exchanges must obtain approval for any regulatory changes, and for the introduction of any new futures or options on futures. All futures exchanges must have trading rules, contracts, and disciplinary procedures approved by the CFTC.