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
 Position  Long  Buy June S&P BSE Sensex Futures @ 15000
 Payoff –
 Profit  if the futures price goes up
 Loss  if the futures price goes down
 Calculation The profit or loss would be equal to fifteen times
the difference in the two rates.
 If June S&P BSE Sensex Futures is sold @ 15500 there would
be a profit of 500 points which is equal to Rs. 7500 (500*15).
 However if the June S&P BSE Sensex However if the June
S&P BSE Sensex Futures is sold @ 14700, there would be a
loss of 300 points which is equal to Rs. 4500 (300*15).
Example 2
 Position  Short – Sell June S&P BSE Sensex Futures @ 15500
 Payoff –
 Profit  if the futures price goes down
 Loss  if the futures price goes up
 Calculation The profit or loss would be equal to fifteen times
the difference in the two rates.
 If June S&P BSE Sensex Futures is bought @ 15900 there
would be a loss of 400 points which is equal to Rs. 6000 (400*15).
 However if the June S&P BSE Sensex Futures is bought
@ 15200, there would be a profit of 300 points which is equal
to Rs. (300*15).
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.
Let's take the illustration given in example 1 where a long position is opened at 15000 and closed at 15800 resulting in a profit of 800 points or Rs. 12000. Let's assume that the position was closed on the fifth day from the day it was taken. Let's 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
Day 1 
14900 
14800 
14500 
Day 2 
15350 
15300 
15100 
Day 3 
15280 
15400 
14950 
Day 4 
14950 
14700 
15200 
Position closed 
15800 
15800 
15800 

Position opened 
15000 



Day 1 

14900 
1490015000 
100 
Day 2 

15350 
1535014900 
450 
Day 3 

15280 
15280 15350 
70 
Day 4 

14950 
14950  15280 
330 
Position closed 
15800 

15800  14950 
850 
Net Profit/ Loss 



800 

Position opened 
15000 



Day 1 

14800 
14800  15000 
200 
Day 2 

15300 
1530014800 
500 
Day 3 

15400 
1540015300 
100 
Day 4 

14700 
14700  15400 
700 
Position closed 
15800 

1580014700 
1100 
Net Profit/ Loss 



800 

Position opened 
15000 



Day 1 

14500 
114500  15000 
500 
Day 2 

15100 
15100 14500 
600 
Day 3 

14950 
14950 15100 
150 
Day 4 

15200 
15200  14950 
250 
Position closed 
15800 

15800 15200 
600 
Net Profit/ Loss 



800 

In all the cases the net resultant is a profit of 800 points, which is the difference between the closing and opening price, irrespective of the daily settlement price and different MTM flows.
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 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.
4. What is a spread position ?
A calendar spread is created by taking simultaneously two positions:
 A long position in a futures series expiring in any calendar month
 A short position in the same futures as 1 above but for a series expiring in any month other than the 1 above.
Examples of Calendar Spreads
 Long June S&P BSE Sensex Futures – Short July S&P BSE
Sensex Futures.
 Short July S&P BSE Sensex Futures – Long August S&P
BSE Sensex Futures
A spread position must be closed by reversing both the legs simultaneously.
The reversal of 1 above would be a sale of June S&P BSE Sensex
Futures while simultaneously buying the July S&P BSE Sensex Futures.
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.
Let’s take an example.
Example 4 – assuming the futures are being traded at the following rates

Bid 
Ask 
Bid 
Ask 
Bid 
Ask 
Rate 
16200 
16250 
17000 
17100 
17500 
17550 

The spread calculations are as follows
June  July 
17000  16200 
800 
July August 
17500  17000 
500 
June  August 
17500  16200 
1300 

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

Bid 
Ask 
Bid 
Ask 
Bid 
Ask 
Rate 
16200 
16250 
17000 
17100 
17500 
17550 

The spreads would be calculated as follows.
June  July 
17000 16250 & 17100 16200 
750 
900 
July August 
17500 17100 & 17590 17000 
400 
590 
June  August 
17500 16250 & 1759016200 
1250 
1390 

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 bidoffer differences of the two futures contract. For example the bidoffer difference for JuneAugust spread is 140 points which is equal to the sum of the bidoffer difference of June Futures 50 points and August Futures 90 points.
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
June  July 
16200 15500 
700 
July August 
17000 16200 
800 
June  August 
17000 15500 
1500 

Example 6
 Position –
 Receiving the spread – Buy near month futures + Sell far month futures
 Paying the spread – Sell near month futures + Buy far month futures
 Payoff –
 Profit  Spread received > spread paid
 Loss  Spread received< spread paid
 June July spread is paid at 700 points . If June July spread can be reversed at higher than 700 points it would result in profit. Assuming that the spread is reversed at 800 points a profit of 100 points or Rs1500 would result.
Pay 
700 
15500 
16200 




Close 

Buy June 
Sell July 
Receive 
800 
15500 
16300 
Profit 
100 
0 
100 

Please note that the spread profit depends only upon the differential received or paid, irrespective of the futures rates. In the above example let's take three cases where reversal is done at 900 points but with substantially different levels for June and July.
Case 1 17000 and 17900
Pay 
700 
15500 
16200 




Close 

Buy June 
Sell July 
Receive 
900 
17000 
17900 
Profit 
200 
1500 
1700 

Case 2  16550 and 17450
Pay 
700 
15500 
16200 




Close 

Buy June 
Sell July 
Receive 
900 
16550 
17450 
Profit 
200 
1050 
1250 

Case 3 – 16000 and 16900
Pay 
700 
15500 
16200 




Close 

Buy June 
Sell July 
Receive 
900 
16000 
16900 
Profit 
200 
500 
700 

You would notice that the profit is always 200 points irrespective of the rates as the spread received is constant at 900 points.