Derivatives Trading: Linear Derivatives and Non-linear Derivatives

A derivative is a financial instrument, whose value is derived from its underlying security. Underlying security can be of various types such as stocks, bonds, commodities, currencies, interest rates, warrant, convertible bonds and market indexes. The underlying security may not necessarily be tradable and financial such as weather derivatives , value of which depends on index of weather conditions .

All derivative instruments can be categorized into two types:

Linear Derivatives
Non- linear Derivatives

Linear Derivatives : Linear derivatives are those instruments, which has a linear functional relationship with the underlying security such as Forward, Futures and Swaps.

Non- linear Derivatives : Non- linear Derivatives on the other hand are those instruments, which has a Non- linear functional relationship with the underlying security such as Options and Convertibles.

Q. What is a Forward Contract?

A Forward Contract is a private agreement between two parties who agree to purchase or sale of a specific quantity of a commodity, government security, foreign currency, or other financial instrument at the agreed price, with delivery and settlement at a specified future date. The terms and conditions of forward contracts are not standardised. Forward contracts are not traded on any designated stock and commodity exchanges of the world. In case of International Forward Contracts both the parties agree to fix the exchange rate for delivery at a specified future date.

Q. What is a Future Contract?

A Future Contract is a legally binding agreement to purchase or sell a standardized, exchange-traded stock, commodity, bond, currency, or stock index at a specified price, on a specified future date. In future Contracts, both the parties have obligation to fulfill the contract.

Q. What is a Swap Contract?

A Swap Contract is an o ver-the-counter (OTC) derivative (i.e they are negotiated outside exchanges), which is an agreement between two parties to exchange commodities, payments or other financial products.

For example, interest rate swaps, where floating rate interest is exchanged for fixed rate interest if the interest rates go down

Q. What are Option Contracts?

An Option contract gives the buyer / holder the right, but not the obligation to buy /sell an underlying security at a specific price/strike price/exercise price on or before a certain date/expiration date. The seller/ writer has the obligation to honour the specified feature of the contract

Q. Of the entire Derivative, instruments discussed above which are the most popular contracts in India ?

In India , the most popular derivative contracts are futures and options.

Q. What are the popular classes of Futures Contracts?

Futures are commonly available in the following flavors (defined by the underlying "cash" product):

Agricultural commodity futures.
Bullion Futures (e.g.gold, silver and other precious metals
A commodity future, for example a Brent Crude Contract, gives you the right to take delievery of some standard lot size of Brent Crude at a fixed price on some date. Alternatively, if you sell the contract, you have the obligation to deliever the Brent Crude to someone.
Foreign Currency for example on the Euro.
Stock and Index Futures. Since you can not really buy index these are settled in cash.
Interest Rate Futures { Notional T – Bills , Notional 10 year bonds (coupon bearing and non-coupon bearing) futures} Again, since you cannot buy an interest rate, these are usually settled in cash as well.

ABOUT FUTURES

Specifically tell me how are Futures useful to an Investor.

Futures are specifically designed to allow the transfer of risk from those investors who want less risk to those who are willing to take on some risk in exchange for compensation. A futures instrument accomplishes the transfer of risk by offering several features:

Liquidity
Leverage (a small amount of money gives exposure to a much larger amount)
A high degree of correlation between changes in the futures price and changes in price of the underlying instrument.

Here are a couple of examples illustrate how futures might be traded. If the price of the future becomes very high relative to the price of the underlying instrument (Index/Stocks/Commodities/Bonds/Currency) today, I can borrow money to buy the underlying instrument now and sell a futures contract (on margin). If the difference in price between the two is great enough then I will be able to repay the interest and principal on the loan and still have some riskless profit; i.e., a pure arbitrage (although I might have to pay some cost of carry).

Conversely, if the price of the future falls too far below that of the underlying instrument, then I can short-sell the underlying instrument and purchase the future. I can (presumably) borrow the until the futures delivery date and then cover my short when I take delivery of some of the underlying instrument at the futures delivery date.

Q. How futures can be used?

Futures contracts can be used in many different ways depending on your investment objectives. Here are two examples:

To safeguard or "hedge" your existing underlying assets if you believe the price will fall.

You could consider opening a futures position to protect your existing asset (eg. your share portfolio) in the event of a down turn in prices. As a holder of the asset, you can sell futures against your equity portfolio to avoid making a loss and without having to incur the costs associated with selling your assets. To "close" the futures position by buy the equivalent amount of futures in the market. Losses in the underlying asset can therefore be compensated by profit made on the futures position.

To profit from volatile market conditions, i.e, to speculate

Futures provide the opportunity to profit from the upward and downward turns in the prices of underlying assets. For a view that market prices will rise, consider buying futures (remember this is a LONG futures position). Conversely, for a view that market prices will fall, consider selling futures (remember this is a SHORT futures position). If the view held materialises, the position can be closed by undertaking an equal and opposite position in the same market in order to profit from the price difference. Remember to close a long position you would sell futures and to close a short position you would buy futures.

Q. How fair price of future contract is determined?

Fair price of a future price is determined by adding Cost of carry (i.e. Financing cost, Storage cost and insurance cost) to Spot Price and by deducting Inflows in terms of dividend or interest.

Fair price = Spot price + Cost of carry - Inflows

The value of a future contract determined through Cost and Carry model in case of non-dividend paying asset F (t) will be found by discounting the present value S (t) at time t to maturity T by the rate of risk-free return r.

F (t) = S (t) x (1+r) (T-t)

For dividend paying asset

F (t) = S (t) x (1+r-d) (T-t) , where d=dividend yield

and in case of continuous compounding

F (t) = S (t) e r (T-t)

Q. How an investor can gain if Fair price is not equal to Market price of the Future contract?

Arbitrage opportunities will exists, if fair price of the future contract is not equal to market price of the future.

In case of fair price being higher than market price of the future contract, arbitrageur will buy in the cash market and simultaneously sell in the futures market.
In case of fair price being lower than market price of the future contract, arbitrageur will sell in the cash market and simultaneously buy in the futures market.

Q. Can I sell a Futures Contract before I own it?

It is just as easy to sell first and then buy back later because a futures contract is an agreement to make the stated exchange at some time in the future. Selling first is referred to as shorting or selling short. To offset your obligation to deliver, all you need to do is buy back your contract(s) prior to expiration.

Q. How do I determine how much capital I need to trade a particular contract?

There is no absolute number. However, you must be able to meet initial margins and margin calls up to your maximum base loss point. That question can be answered only after determining the size of your trade advantage and the percent of capital you're willing to risk on each trade. If you use common sense, do your homework to get the best estimate possible of your trade advantage, and then risk small amount of money, you can have a profitable trading experience starting with a little amount. If you're trading contracts with relatively small market values, you could start with even less.

Q. Do I have to watch the markets constantly if I trade?

Not necessarily, if you use stop-loss orders and manage your money prudently, you may not always need to watch the markets.

Q. What are margin and leverage?

Margin is the equivalent of a 'good faith' deposit. It is a small percentage, of the value of the contract that is deposited with a broker. Margin deposits are set by the exchange and are subject to change with price movement and market volatility. Leverage is the ability to use a small amount of money to make an investment of greater value so that small price changes can result in huge profits or losses.

Q. How does margining work?

When you place a trade, you pay an initial margin of the underlying value of the contract. However, the margin required may vary according to the volatility of the market Clearing House and a further payment (or refund) may be required. The margin is later refunded when the futures position is closed (provided there are no outstanding payments).

Q. What are the risks?

There are risks involved in trading futures and the potential for losses can be great. Futures are highly leveraged, so you can lose more than the amount you initially invest. SMC recommends you to:

Talk to our research analysts or planner about whether futures trading suits your individual financial objectives, your risk appetite and your potential gains.
Study futures trading carefully.
Attend investor awareness seminars on trading futures conducted by SMC.

Q. Who are “Hedgers” and “Speculators”?

Hedgers are interested in the products of the futures contracts. They can be producers, like farmers, mining companies and oil drillers. Or they can be users, like bankers, paper mills and oil distributors. In general, producers sell futures contracts while users buy them. Speculators, trade futures strictly to make money. Typically, speculators trade futures contracts, but never use the underlying instrument itself. Speculators may either buy or sell contracts depending on which way they think the market is going in a particular underlying instrument.

Q. What does going long or short mean?

Going long means buying a futures contract. Going short means selling a futures contract.

Q. What is open interest?

Open interest refers to the number of outstanding contracts that remain open. For example, if a position was taken in a contract, and at the expiry of that contract, instead of closing out the position, the trader decided to roll the contract over (ie open a similar position in the next expiry month), their open interest in that contract would continue. If however the trader decided to close out their position, the open interest for that contract would decrease.

ABOUT OPTIONS

Q. What is an option?

An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date. An option is also a derivative. That is, its value is derived from the underlying instrument. In the case of a stock option, its value is based on the underlying stock (equity). In the case of an index option, its value is based on the underlying index (equity).

Option Contracts are of two types:

Call Option: Buyer has the right to buy the underlying security.
Put Option: Buyer has the right to sell the underlying security.

Based on the styles Option Contracts are classified into: I. American Option: Buyer can exercise the option i.e. buy/ sell the underlying security on or before the expiration date of the option contract. II.European Option: Buyer can exercise the option i.e. buy/ sell the underlying security only on the expiration date of the option contract.

Q. What are Call Option Contracts ?

Call Option Contracts gives the buyer/holder the right, but not the obligation to buy a stock, bond, commodity, or other instrument at a specified price/ strike price/exercise price within a specific time period. The seller/writer is obliged to sell the stock, bond, commodity or financial instrument at that strike price, if the buyer does choose to exercise the option.

Payoff profile of a call option

Example: An investor buys One European call option on Infosys at the strike price of Rs. 3500 at a premium of Rs. 100. If the market price of Infosys on the day of expiry is more than Rs. 3500, the option will be exercised.

The investor will earn profits once the share price crosses Rs. 3600 (Strike Price + Premium i.e. 3500+100).

Suppose stock price is Rs. 3800, the option will be exercised and the investor will buy 1 share of Infosys from the seller of the option at Rs 3500 and sell it in the market at Rs 3800 making a profit of Rs. 200 {(Spot price - Strike price) - Premium}.

In another scenario, if at the time of expiry stock price falls below Rs. 3500 say suppose it touches Rs. 3000, the buyer of the call option will choose not to exercise his option. In this case the investor loses the premium (Rs 100), paid which shall be the profit earned by the seller of the call option.

Q. What are Put Option Contracts ?

Put Option Contracts gives the buyer/holder the right, but not the obligation to sell a stock, bond, commodity, or other instrument at a specified price/ strike price/exercise price within a specific time period. The seller/writer is obliged to buy the stock, bond, commodity or financial instrument at that strike price, if the buyer does choose to exercise the option.

Payoff profile of a put option

Example: An investor buys one European Put option on Reliance at the strike price of Rs. 300/-, at a premium of Rs. 25/-. If the market price of Reliance, on the day of expiry is less than Rs. 300, the option can be exercised as it is 'in the money'.

The investor's Break even point is Rs. 275/ (Strike Price - premium paid) i.e., investor will earn profits if the market falls below 275.

Suppose stock price is Rs. 260, the buyer of the Put option immediately buys Reliance share in the market @ Rs. 260/- & exercises his option selling the Reliance share at Rs 300 to the option writer thus making a net profit of Rs. 15 {(Strike price - Spot Price) - Premium paid}.

In another scenario, if at the time of expiry, market price of Reliance is Rs 320/ - , the buyer of the Put option will choose not to exercise his option to sell as he can sell in the market at a higher rate. In this case the investor loses the premium paid (i.e Rs 25/-), which shall be the profit earned by the seller of the Put option.

Q. How are Futures different from Options?

Following are the difference.

Futures	Options
1. Futures Contracts have symmetric risk profile for both buyers as well as sellers.	1. Options have asymmetric risk profile.
2. Futures have unlimited downsize risk as well as unlimited profit potential.	2. In case of Options, for a buyer (or holder of the option), the downside is limited to the premium (option price) he has paid while the profits may be unlimited. For a seller or writer of an option, however, the downside is unlimited while profits are limited to the premium he has received from the buyer.
3. The futures contracts prices are affected mainly by the prices of the underlying asset.	3. Prices of options are however; affected by prices of the underlying asset, time remaining for expiry of the contract and volatility of the underlying asset.
4. It costs nothing to enter into a futures contract.	4. Whereas there is a cost of entering into an options contract, termed as Premium.

Q. What are In the Money, At the Money and Out of the money Options?

An option is said to be 'at-the-money', when the option's strike price is equal to the underlying asset price. This is true for both puts and calls.

A call option is said to be in-the-money when the strike price of the option is less than the underlying asset price. For example, a Nifty call option with strike of 2900 is 'in-the-money', when the spot Nifty is at 3100 as the call option has value.

Diagrammatic representation of In-the money, At-the-money and Out-of-the-money Call Options:

The call holder has the right to buy a Nifty at 2900, no matter how much the spot market price has risen. And with the current price at 3100, a profit can be made by selling Nifty at this higher price.

On the other hand, a call option is out-of-the-money when the strike price is greater than the underlying asset price. Using the earlier example of Nifty call option, if the Nifty falls to 2700, the call option no longer has positive exercise value. The call holder will not exercise the option to buy Nifty at 2900 when the current price is at 2700.

A put option is in-the-money when the strike price of the option is greater than the spot price of the underlying asset. For example, a Nifty put at strike of 3400 is in-the-money when the Nifty is at 3100. When this is the case, the put option has value because the put holder can sell the Nifty at 3400, an amount greater than the current Nifty of 3100.

Likewise, a put option is out-of-the-money when the strike price is less than the spot price of underlying asset. In the above example, the buyer of Nifty put option won't exercise the option when the spot is at 3400. The put no longer has positive exercise value.

Q. What are deep in the money options (or deep out of the money options)?

Options are said to be deep in-the-money (or deep out-of-the-money) if the exercise price is at significant variance with the underlying asset price.

Q. What are Covered and Naked Calls?

A call option position that is covered by an opposite position in the underlying instrument (for example shares, commodities etc) is called a covered call.

Writing covered calls involves writing call options when the shares that might have to be delivered (if option holder exercises his right to buy), are already owned.

E.g. A writer writes a call on Ranbaxy and at the same time holds shares of Ranbaxy so that if the call is exercised by the buyer, he can deliver the stock.

Covered calls are far less risky than naked calls (where there is no opposite position in the underlying), since the worst that can happen is that the investor is required to sell shares already owned at below their market value.

Q. What is the Intrinsic Value of an option?

The intrinsic value of an option is defined as the amount by which an option is in the money or the immediate exercise value of the option when the underlying position is marked-to-market.

For a call option:

Intrinsic Value = Spot Price - Strike Price

For a put option:

Intrinsic Value = Strike Price - Spot Price

The intrinsic value of an option must be a positive number or 0. It cannot be negative. For a call option, the strike price must be less than the price of the underlying asset for the call to have an intrinsic value greater than 0. For a put option, the strike price must be greater than the underlying asset price for it to have intrinsic value.

Q. What is the Time Value with reference to Options?

Time value is the amount option buyers are willing to pay for the possibility that the option may become profitable prior to expiration due to favorable change in the price of the underlying. An option loses its time value as its expiration date nears. At expiration an option is worth only its intrinsic value. Time value cannot be negative.

Q. What are the factors that affect the value of an option (premium)?

Factors that affect the value of the option premium:

Quantifiable Factors:

Underlying stock price.
The strike price of the option.
The volatility of the underlying stock.
The time to expiration of option contract.
The risk free interest rate.
Dividend.

Non-Quantifiable Factors:

Market participants' varying estimates of the underlying asset's future volatility.
Individuals' varying estimates of future performance of the underlying asset, based on fundamental or technical analysis.
The effect of supply & demand- both in the options marketplace and in the market for the underlying asset.
The "depth" of the market for that option - the number of transactions and the contract's trading volume on any given day.

Q. What are different pricing models for options?

The theoretical option pricing models are used by option traders for calculating the fair value of an option on the basis of the earlier mentioned influencing factors.

An option pricing model assists the trader in keeping the prices of calls & puts in proper numerical relationship to each other & helping the trader make bids & offer quickly. The two most popular option pricing models are:

Black Scholes Model which assumes that percentage change in the price of underlying follows a normal distribution.

Binomial Model which assumes that percentage change in price of the underlying follows a binomial distribution.

Q. Who decides on the premium paid on options & how is it calculated?

Options Premium is not fixed by the Exchange. The fair value/ theoretical price of an option can be known with the help of pricing models and then depending on market conditions, the price is determined by competitive bids and offers in the trading environment.

An option's premium / price is the sum of Intrinsic value and time value (explained above). If the price of the underlying stock is held constant, the intrinsic value portion of an option premium will remain constant as well.

Therefore, any change in the price of the option will be entirely due to a change in the option's time value.

The time value component of the option premium can change in response to a change in the volatility of the underlying, the time to expiry, interest rate fluctuations, dividend payments and to the immediate effect of supply and demand for both the underlying and its option.

Q. Explain the Option Greeks?

The price of an Option depends on certain factors like price and volatility of the underlying, time to expiry etc. The option Greeks are the tools that measure the sensitivity of the option price to the above mentioned factors.

They are often used by professional traders for trading and managing the risk of large positions in options and stocks. These Option Greeks are:

Delta: is the option Greek that measures the estimated change in option premium/price for a change in the price of the underlying.

Gamma: measures the estimated change in the Delta of an option for a change in the price of the underlying.

Vega: measures estimated change in the option price for a change in the volatility of the underlying.

Theta : measures the estimated change in the option price for a change in the time to option expiry.

Rho : measures the estimated change in the option price for a change in the risk free interest rates.

Q. Who are the likely players in the Options Market?

Developmental institutions, Mutual Funds, FIs, FIIs, Brokers, Retail Participants are the likely players in the Options Market.

Q. How can I use options?

If you anticipate a certain directional movement in the price of a stock, the right to buy or sell that stock at a predetermined price, for a specific duration of time can offer an attractive investment opportunity.

The decision as to what type of option to buy is dependent on whether your outlook for the respective security is positive (bullish) or negative (bearish).

If your outlook is positive, buying a call option creates the opportunity to share in the upside potential of a stock without having to risk more than a fraction of its market value (premium paid).

Conversely, if you anticipate downward movement, buying a put option will enable you to protect against downside risk without limiting profit potential.

Purchasing options offer you the ability to position yourself accordingly with your market expectations in a manner such that you can both profit and protect with limited risk.

Q. Once I have bought an option and paid the premium for it, how does it get settled?

Option is a contract, which has a market value like any other tradable commodity. Once an option is bought there are following alternatives that an option holder has:

You can sell an option of the same series as the one you had bought and close out /square off your position in that option at any time on or before the expiration.

You can exercise the option on the expiration day in case of European Option or; on or before the expiration day in case of an American option. In case the option is 'Out of Money' at the time of expiry, it will expire worthless.

Q. What are the risks involved for an options buyer?

The risk/ loss of an option buyer is limited to the premium that he has paid.

Q. What are the risks for an Option writer?

The risk of an Options Writer is unlimited where his gains are limited to the Premiums earned. When a physical delivery uncovered call is exercised upon, the writer will have to purchase the underlying asset and his loss will be the excess of the purchase price over the exercise price of the call reduced by the premium received for writing the call.

Q. How can an option writer take care of his risk?

Option writing is a specialized job which is suitable only for the knowledgeable investor who understands the risks, has the financial capacity and has sufficient liquid assets to meet applicable margin requirements. The risk of being an option writer may be reduced by the purchase of other options on the same underlying asset thereby assuming a spread position or by acquiring other types of hedging positions in the options/ futures and other correlated markets.

Q. What are Stock Index Options?

The Stock Index Options are options where the underlying asset is a Stock Index for e.g. Options on S&P 500 Index/ Options on BSE Sensex etc. Index Options were first introduced by Chicago Board of Options Exchange in 1983 on its Index 'S&P 100'. As opposed to options on Individual stocks, index options give an investor the right to buy or sell the value of an index which represents group of stocks.

Q. What are the uses of Index Options?

Index options enable investors to gain exposure to a broad market, with one trading decision and frequently with one transaction. To obtain the same level of diversification using individual stocks or individual equity options, numerous decisions and trades would be necessary.

Since, broad exposure can be gained with one trade, transaction cost is also reduced by using Index Options. As a percentage of the underlying value, premiums of index options are usually lower than those of equity options as equity options are more volatile than the Index.

Q. What are Options on individual stocks?

Options contracts where the underlying asset is an equity stock are termed as Options on stocks. They are mostly American style options cash settled or settled by physical delivery.

Prices are normally quoted in terms of the premium per share, although each contract is invariably for a larger number of shares, e.g. 100.

Q. Whether the holders of equity options contracts have all the rights that the owners of equity shares have?
Holder of the equity options contracts do not have any of the rights that owners of equity shares have - such as voting rights and the right to receive bonus, dividend etc. To obtain these rights a Call option holder must exercise his contract and take delivery of the underlying equity shares.

Q. What are Leaps (long term equity anticipation securities)?

Long term equity anticipation securities (Leaps) are long-dated put and call options on common stocks or ADRs.

These long-term options provide the holder the right to purchase, in case of a call, or sell, in case of a put, a specified number of stock shares at a pre-determined price up to the expiration date of the option, which can be three years in the future.

Q. What are exotic Options?

Derivatives with more complicated payoffs than the standard European or American calls and puts are referred to as Exotic Options. Some of the examples of exotic options are as under:

Barrier Options: where the payoff depends on whether the underlying asset's price reaches a certain level during a certain period of time.

CAPS traded on CBOE (traded on the S&P 100 & S&P 500) are examples of Barrier Options where the pay-out is capped so that it cannot exceed $30.

A Call CAP is automatically exercised on a day when the index closes more than $30 above the strike price. A put CAP is automatically exercised on a day when the index closes more than $30 below the cap level.

Binary Options: are options with discontinuous payoffs. A simple example would be an option which pays off if price of an Infosys share ends up above the strike price of say Rs. 4000 & pays off nothing if it ends up below the strike.

Q. What are Over-The-Counter Options?

Over-The-Counter options are those dealt directly between counter-parties and are completely flexible and customized. There is some standardization for ease of trading in the busiest markets, but the precise details of each transaction are freely negotiable between buyer and seller.

Q. What is SPAN?

Specific Portfolio Analysis of Risk (SPAN) is a worldwide acknowledged risk management system developed by Chicago Mercantile Exchange (CME). It is a portfolio-based margin calculating system adopted by all major Derivatives Exchanges.

Q. What is PC-SPAN?

PC-SPAN is an easy to use program for PC's which calculates SPAN margin requirements at the members' end. How PC SPAN works:

Each business day the exchange generates risk parameter file (parameters set by the exchange) which can be down loaded by the member.

The position file consisting of members' trades (own + clients) and the risk parameter file has to be fed into PC-SPAN for calculation of Margins payable for the trades executed.

The Initial Margin would be based on worst-case loss of the portfolio of a client to cover 99 per cent VaR over two days horizon. The Initial Margin would be netted at client level and shall be on gross basis at the Trading/Clearing member level. The Portfolio will be marked to market on a daily basis.

Q. How will the assignments of options takes place?

On Exercise of an Option by an Option Holder, the trading software will assign the exercised option to the option writer on random basis based on a specified algorithm.

Q. What does an investor need to do to trade in options?

An investor has to register himself with a broker who is a member of the NSE Derivatives Segment.

If he wants to buy an option, he can place the order for buying a Nifty Call or Put option with the broker. The Premium has to be paid up-front in cash.

He can either hold on to the contract till its expiry or square up his position by entering into a reverse trade. If he closes out his position, he will receive Premium in cash, the next day.

If the investor holds the position till expiry day and decides to exercise the contract, he will receive the difference between Option Settlement price and the Strike price in cash. If he does not exercise his option, it will expire worthless.

If an investor wants to write/ sell an option, he will place an order for selling Nifty Call/ Put option. Initial margin based on his position will have to be paid up-front (adjusted from the collateral deposited with his broker) and he will receive the premium in cash, the next day.

Everyday his position will be marked to market and variance margin will have to be paid. He can close out his position by a buying the option by paying requisite premium. The initial margin which he had paid on the first position will be refunded.

If he waits till expiry, and the option is exercised, he will have to pay the difference in the Strike price and the options settlement price, in cash. If the option is not exercised, the investor will not have to pay anything.

Q. What are the different types of products available in India for trading in F&O segment?

The different types of products available in India for trading in F&O segment of NSE are:

S&P CNX Nifty futures.
S&P CNX Nifty Options.
Futures on Individual Securities.
Options on Individual Securities.
CNXIT Futures.
CNXIT Options.
BANK Nifty Futures.
BANK Nifty Options.
Interest Rate Derivatives.

Q. What are the contract specifications and trading parameters of S&P CNX Nifty Futures ?

The underlying instrument of S &P CNX Nifty Futures is the index S &P CNX Nifty. These contracts can have a trading cycle of maximum 3 months- the near month (one), the next month (two) and the far month (three).

With the expiration of near month contract on the last thursday of each month, a fresh contract is introduced on the very next day. The contract will expire on the previous trading day if last Thursday of the month is a trading holiday.

The minimum value of an Index Future contract is Rs2, 00,000.

Tick size of Nifty Futures is Re0.05.

On the day of introduction of future contract, Base price of S&P CNX Nifty futures contracts would be the previous day's closing Nifty value, which is the theoretical future price.

Q. What are the contract specifications and trading parameters of S&P CNX Nifty Options ?

The underlying instrument of S &P CNX Nifty Options is the index S &P CNX Nifty. These contracts can have a trading cycle of maximum 3 months- the near month (one), the next month (two) and the far month (three).

All Nifty Options contracts are of European Style i.e. these contracts can be exercised only on the expiration date.

The minimum value of an Index Options contract is Rs2, 00,000.

Tick size of Nifty Options is Re0.05. On the day of introduction of Options contract, Base price of S&P CNX Nifty Options contracts would be the premium calculated through Black-Scholes model, which is the theoretical value. In the following days, last half an hour weighted average price is considered as the base price. If the Option Contract is not traded in the last half an hour then last traded price (LTP) of the day is considered as the base price.

If on any trading day the contract is not at all traded, base price for the next trading day shall be calculated through Black- Scholes model, which is the theoretical price of the options contract.

Q. What are the contract specifications and trading parameters of Futures on Individual Securities ?

The Underlying security for the Futures on individual securities contracts shall be the underlying security available for trading in the capital market segment of the exchange. These contracts can have a trading cycle of maximum 3 months- the near month (one), the next month (two) and the far month (three).

The minimum value of an Index Future contract is Rs2, 00,000.

Tick size of Nifty Futures is Re0.05.

On the day of introduction of future contract, Base price of futures contracts would be its theoretical future price. In the following days daily settlement price of the futures contracts is its base price.

Q. What are the contract specifications and trading parameters of Options on Individual Securities ?

The Underlying security for the options on individual securities contracts shall be the underlying security available for trading in the capital market segment of the exchange These contracts can have a trading cycle of maximum 3 months- the near month (one), the next month (two) and the far month (three).

The minimum value of a contract is Rs2, 00,000.

Tick size of an Option contract is Re0.05.

All Options on Individual Securities contracts are of American Style.

Q. What are the contract specifications and trading parameters of CNXIT Futures ?

The underlying security of S &P CNX IT Futures contract is the Index S &P CNX IT. These contracts can have a trading cycle of maximum 3 months- the near month (one), the next month (two) and the far month (three).

With the expiration of near month contract on the last Thursday of each month, a fresh contract is introduced on the very next day. The contract will expire on the previous trading day if last Thursday of the month is a trading holiday.

The minimum value of a CNX IT Future contract is Rs2, 00,000.

Tick size of CNX IT Futures is Re0.05.

On the day of introduction of future contract, Base price of S&P CNX IT futures contract would be the previous day's closing CNX IT index value, which is the theoretical future price.

In the following days daily settlement price of the futures contracts is its base price.

Q. What are the contract specifications and trading parameters of CNXIT Options ?

The underlying instrument of S &P CNX IT Options is the index S &P CNX IT. These contracts can have a trading cycle of maximum 3 months- the near month (one), the next month (two) and the far month (three).

All CNX IT Options contracts are of European Style i.e. these contracts can be exercised only on the expiration date.

The minimum value of a CNX IT Options contracts is Rs2, 00,000.

Tick size of CNX IT Options is Re0.05.

On the day of introduction of Options contract, Base price of S&P CNX IT Option contracts would be the premium calculated through Black-Scholes model, which is the theoretical value. In the following days, last half an hour weighted average price is considered as the base price. If the Option Contract is not traded in the last half an hour then last traded price (LTP) of the day is considered as the base price.

Q. What are the contract specifications and trading parameters of CNX BANK Nifty Futures ?

The underlying instrument of S &P CNX BANK Nifty Futures is the index S &P CNX BANK Nifty. These contracts can have a trading cycle of maximum 3 months- the near month (one), the next month (two) and the far month (three).

The minimum value of a CNX BANK Nifty Future contract is Rs2, 00,000.

Tick size of CNX BANK Nifty Futures is Re0.01.

On the day of introduction of future contract, Base price of S&P CNX BANK Nifty futures contracts would be the previous day's closing BANK Nifty value, which is the theoretical future price.

Q. What are the contract specifications and trading parameters of CNX BANK Nifty Options ?

The underlying instrument of S &P CNX BANK Nifty Options is the index S &P CNX BANK Nifty . These contracts can have a trading cycle of maximum 3 months- the near month (one), the next month (two) and the far month (three).

All CNX BANK Nifty Options contracts are of European Style i.e. these contracts can be exercised only on the expiration date.

The minimum value of a CNX BANK Nifty Options contracts is Rs2, 00,000.

Tick size of CNX BANK Nifty Options is Re0.05.

On the day of introduction of Options contract, Base price of CNX BANK Nifty Option contracts would be the premium calculated through Black-Scholes model, which is the theoretical value. In the following days, last half an hour weighted average price is considered as the base price.

If the Option Contract is not traded in the last half an hour then last traded price (LTP) of the day is considered as the base price.

Q. What are the contract specifications and trading parameters of Interest Rate Future Contracts ?

The underlying securities of Interest Rate Future Contracts are Notional Government Of India 91 Day T- bills (Treasury bills), Notional 10 year coupon bearing bond and Notional 10 year zero-coupon bond.

These contracts can have a trading cycle for a period of maturity of one year with three months continuous contracts for the first three months and fixed quarterly contracts for the whole year. With the expiration of near month contract on the last Thursday of each month, a fresh contract is introduced on the very next day. The contract will expire on the previous trading day if last Thursday of the month is a trading holiday. Also if last Thursday were banks annual or half-yearly closing date, previous trading day would be considered as expiration date.

Permitted trading lot size of Interest Rate Future Contracts is 2000

The minimum value of an Interest Rate Future contract is Rs2, 00,000.

Tick size of Interest Rate Futures is Re0.05.

On the day of introduction of future contract, Base price of Interest Rate futures contract would be the previous day's closing value of notional underlying security, which is the theoretical future price. In the following days daily settlement price of the futures contracts is its base price.