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5.1 What is the underlying for SENSEX Futures 5.2 What is the contract multiplier 5.3 What is the ticker symbol and trading hours 5.4 What is the maturity of the futures contract 5.6 How is the final settlement price determined
6.1 What are the profits and losses in case of a futures position? 6.2 What happens to the profit or loss due to daily settlement? 6.3 How does the Initial Margin affect the above profit or loss? 6.4 What is a spread position? 6.5 How are spread rates calculated ? Please illustrate with an example. 6.6 How do we calculate spreads in case of two way quotations? 6.7 Please give a simple illustration to explain the mechanics of spread trading?
The underlying for the SENSEX futures is the BSE Sensitive Index of 30 scrips, popularly called the SENSEX.
5.2 What is the contract multiplier The contract multiplier is 50. This means that the Rupee notional value of a futures contract would be 50 times the contracted value. The following table gives a few examples of this notional value.
5.3 What is the ticker symbol and trading hours The ticker symbol is BSX. The trading hours are the same as in cash market.
5.4 What is the maturity of the futures contractWhat is the maturity of the futures contract Regulations permit introduction of futures upto 12 months maturity. Initially, however, futures for the three near months have been introduced. On 9th June the three futures for June, July and August 2000 were started. These futures would expire on 29th June, 27th July and 31st August respectively. This is because the expiry date has been fixed as the last Thursday of the month for each month. The day after the expiry, a new future would come into existence for three month maturity. For example on 30th of June the September future would come into existence. This future would expire on 28th of September, being the last Thursday of the month.
5.5 What is the tick sizeWhat is the tick size The tick size is "0.1". This means that the minimum price fluctuation in the value of a future can be only 0.1. In Rupee terms, this translates to minimum price fluctuation of Rs. 5 ( Tick size X Contract Multiplier = 0.1 X Rs. 50).
5.6 How is the final settlement price determinedHow is the final settlement price determined The futures closing price will be calculated based on a set of 120 price points of the cash sensex values taken between the last half an hour of trading. The highest and lowest 20 price points will be ignored and the closing price computed as an average of the remaining 80 price points. This process will ensure that manipulation of the closing price by moving it in one direction for a short duration or for only a few contracts is eliminated.
6.1 What are the profits and losses in case of a futures position? The profits and losses would depend upon the difference between the price at which the position is opened and the price at which it is closed. Let us take some examples. Example 1
Example 2
6.2 What happens to the profit or loss due to daily settlement? In case the position is not closed the same day, the daily settlement would alter the cash flows depending on the settlement price fixed by the exchange every day. However the net total of all the flows every day would always be equal to the profit or loss calculated above. Profit or loss would only depend upon the opening and closing price of the position, irrespective of how the rates have moved in the intervening days. Lets take the illustration given in example 1 where a long position is opened at 4,800 and closed at 4,900 resulting in a profit of 100 points or Rs. 5,000. Lets assume that the position was closed on the fifth day from the day it was taken. Lets also assume three different series of closing settlement prices on these days and look at the resultant cash flows. Example 3 Daily closing settlement price
In all the cases the net resultant is a
profit of 100 points, which is the difference between the closing and opening price,
6.3 How does the Initial Margin affect the above profit or loss? The initial margin is only a security provided by the client through the clearing member to the exchange. It can be withdrawn in full after the position is closed. Therefore it does not affect the above calculation of profit or loss. However there would may be a funding cost / transaction cost in providing the security. This cost must be added to your total transaction costs to arrive at the true picture. Other items in transaction costs would include brokerage, stamp duty etc.
6.4 What is a spread position? A calendar spread is created by taking simultaneously two positions
Examples of Calendar Spreads
A spread position must be closed by reversing both the legs simultaneously. The reversal of 1 above would be a sale of June Sensex Futures while simultaneously buying the July Sensex Futures.
6.5 How are spread rates calculated ? Please illustrate with an example. The profit or loss in case of spreads depends only upon the difference between the rates for the two different calendar months. The real position is only of the differential – irrespective of the two rates. Lets take an example. Example 4 – assuming the futures are being traded at the following rates
The spread calculations are as follows
6.6 How do we calculate spreads in case of two way quotations? In case the prices are quoted as bid and offer, the spreads would also have a two way quotation. While calculating use thumb rule that the spread rate calculated must have the maximum spread possible from the two given rates. Example 5 – Lets assume the futures are being traded at the following rates
The spreads would be calculated as follows.
Another thumb rule to check the correctness of calculation is that the bid offer difference of the spread must be equal to the sum of the bid-offer differences of the two futures contract. For example the bid-offer difference for June-August spread is 12 points which is equal to the sum of the bid-offer difference of June Futures (2 points) and August Futures (10 points).
6.7 Please give a simple illustration to explain the mechanics of spread trading? To illustrate lets assume that the market is in contango i.e. the futures price is higher than the cash underlying price and the futures price of far month is higher than the futures price of the near month.
The spread calculations are as follows
Example 6
Please note that the spread profit depends only upon the differential received or paid, irrespective of the futures rates. In the above example lets take three cases where reversal is done at 100 points but with substantially different levels for June and July. Case 1 – 5000 and 5100
Case 2 – 4550 and 4650
Case 3 – 4000 and 4100
You would notice that the profit is always 20 points irrespective of the rates as the spread received is constant at 100 points.
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