Marico Ltd. Maruti Suzuki India Ltd. Max Financial Services Ltd. MindTree Ltd. Motherson Sumi Systems Ltd. MphasiS Ltd. Muthoot Finance. National Aluminium Co. Navin Fluorine International Ltd. Nestle India Ltd. Page Industries. Petronet LNG Ltd. Pfizer Ltd. PI Industries Limited. Pidilite Industries Ltd. Piramal Enterprises. Power Finance Corporation Ltd. Power Grid Corporation of India Ltd. Punjab National Bank.
PVR Limited.
REC Ltd. Reliance Industries Ltd. Shree Cement Ltd. Shriram Transport Finance Co. Siemens Ltd. SRF Ltd. State Bank of India. Steel Authority of India Ltd. Sun Pharmaceutical Industries Ltd. Sun TV Network Ltd. Tata Chemicals Ltd. Tata Consultancy Services Ltd. Tata Consumer Products Ltd.
Tata Motors Ltd. Tata Power Co. Tata Steel Ltd. Tech Mahindra Ltd. The Ramco Cements Ltd. Titan Company Ltd. Torrent Pharmaceuticals Ltd. Torrent Power Ltd. Trent Ltd. UltraTech Cement Ltd. United Breweries Ltd. United Spirits Ltd. UPL Ltd. Vedanta Ltd. Vodafone Idea Ltd. Voltas Ltd. So you will definitely prefer to buy share from Kumar at Rs. Your profit is Rs. If the price of the share is Rs. So what profit does Kumar get here? When you enter into a contract, you are required to pay a premium.
Put option buyer has the right to sell but has no obligation to sell the contract and put option seller has the obligation to buy. In this case too, the buyer of the contract pays premium. Profit is unlimited in case of contract buyer whereas it is limited in case of contract seller. In case of stock futures, the underlying asset is an individual stock. Market lot, tick size, expiry date, price quote and other standard specifications are mentioned in these contracts.
Futures price is based on the sum of spot price and cost of carry. These are based on an underlying index. This is a very important tool with which you can hedge your risk. It gives an opportunity to buy shares indirectly by buying the index. Start trading in futures as it offers tremendous potential to make profits. Hope you got a glimpse of future and options contract by reading this article. Happy Trading! We serve cookies on this site to analyze traffic, remember your preferences, and optimize your experience.
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Home Knowledge Center Beginner Futures and options. Karvy Financial Academy. Beginner Intermediate Advanced. What is Trading Account? Futures and Options Stock market offers several products for investment and trading purposes. Firstly, let us read about what is future trading in stock market What are futures? You can actually trade using lesser margins in case of futures contract What are options? There are 2 types of options namely call option and put option 1. Call option In this case, the owner has the right but has no obligation to buy the asset.
But a farmer who planted in the spring and sold a futures contract committed to deliver his grain in the fall for a definite price. Not only did he receive cash in the spring in return for his commitment, but he also received the contract price for his crop even if the market price subsequently fell because of an unexpected glut of corn. In exchange the farmer gave up the chance to get a higher price in the event of a drought or blight; he received the same fixed price for which he had contracted.
In the latter case, the farmer would have netted more if he had not sold the future; however, most farmers prefer not to gamble on the corn market. Farming is risky enough, thanks to uneven rainfalls and unpredictable pests, without adding the risk of changes in market prices. Farmers thus seek to lock in a value on their crop and are willing to pay a price for certainty.
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They give up the chance of very high prices in return for protection against abysmally low prices. This practice of removing risk from business plans is called hedging.
As a rule of thumb, about half of the participants in the futures markets are hedgers who come to market to remove or reduce their risk. For the market to function, however, it cannot consist only of hedgers seeking to lay off risk. There must be someone who comes to market in order to take on risk. Some speculators, against all odds, have become phenomenally wealthy by trading futures.
Interestingly, even the wealthiest speculators often report having gone broke one or more times in their career. Because speculation offers the promise of astounding riches with little apparent effort, or the threat of devastating losses despite even the best efforts, it is often compared to casino gambling. The difference between speculation in futures and casino gambling is that futures market speculation provides an important social good, namely liquidity. If it were not for the presence of speculators in the market, farmers, bankers, and business executives would have no easy and economical way to eliminate the risk of volatile prices, interest rates, and exchange rates from their business plans.
Speculators, however, provide a ready and liquid market for these risks—at a price. Speculators who are willing to assume risks for a price make it possible for others to reduce their risks. Competition among speculators also makes hedging less expensive and ensures that the effect of all available information is swiftly calculated into the market price.
FUTURES AND OPTIONS
Weather reports, actions of central banks, political developments, and anything else that can affect supply or demand in the future affect futures prices almost immediately. There seems to be no limit to the potential applications of futures market technology. The exchange later introduced crude oil, gasoline, and natural gas futures. Airlines, shipping companies, public transportation authorities, home-heating-oil delivery services, and major multinational oil and gas companies have all sought to hedge their price risk using these futures contracts. Meanwhile, international stock market investors have discovered that stock-index futures, besides being useful for hedging, also are an attractive alternative to actually buying stocks.
Comparing options on futures with stock options
Because a stock-index future moves in tandem with the prices of the underlying stocks, it gives the same return as owning stocks. Yet the stock-index future is cheaper to buy and may be exempt from certain taxes and charges to which stock ownership is subject. Some large institutional investors prefer to buy German stock-index futures rather than German stocks for this very reason.
Because stock-index futures are easier to trade than actual stocks, the futures prices often change before the underlying stock prices do. In the October crash, for example, prices of stock-index futures in Chicago fell before prices on the New York Stock Exchange collapsed, leading some observers to conclude that futures trading had somehow caused the stock market crash that year. In fact, investors who wanted to sell stocks could not sell quickly and efficiently on the New York Stock Exchange and therefore sold futures instead.
The futures market performed its function of price discovery more rapidly than the stock market did. Futures contracts have even been enlisted in the fight against air pollution and the effort to curb runaway health insurance costs. When the Environmental Protection Agency decided to allow a market for sulfur dioxide emission allowances under the amendments to the Clean Air Act, the Chicago Board of Trade developed a futures contract for trading what might be called air pollution futures.
The reason? If futures markets provide price discovery and liquidity to the market in emission allowances, companies can decide on the basis of straightforward economics whether it makes sense to reduce their own emissions of sulfur dioxide and sell their emission allowance to others, or instead to sustain their current emission levels and purchase emission allowances from others.
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Without a futures market it would be difficult to know whether a price offered or demanded for emissions allowances is high or low. But hedgers and speculators bidding in an open futures market will cause quick discovery of the true price, the equilibrium point at which buyers and sellers are both equally willing to transact.
Similar reasoning has led to some decidedly unconventional applications of futures technology. The Iowa Electronic Market introduced political futures in , and this market has generally beaten the pollsters at predicting not only the winner of the White House but also the winning margin. This makes sense because people are much more careful with information when they are betting money on it than when they are talking to a pollster.
Economist Richard Roll showed that the orange juice futures market is a slightly better predictor of Florida temperatures than the National Weather Service. The idea was to let people speculate on events in the Middle East and win real money if they made the right bet. Congressional outrage nipped that plan in the bud, but the underlying logic was sound.
If futures markets are an efficient mechanism for assimilating information and assessing probabilities, why not use them for statecraft and military applications? Options are among the most important inventions of contemporary finance. Whereas a futures contract commits one party to deliver, and another to pay for, a particular good at a particular future date, an option contract gives the holder the right, but not the obligation, to buy or sell.
Options are attractive to hedgers because they protect against loss in value but do not require the hedger to sacrifice potential gains. Most exchanges that trade futures also trade options on futures. There are other types of options as well. The Philadelphia Stock Exchange has a thriving business in currency options. The options market owes a good deal of its success to the development of the Black-Scholes option pricing model.