Futures Contract – Simple Numerical Problems

1. Introduction

In exams, Futures problems focus on three areas: Calculating Fair Price, Calculating Profit/Loss, and Hedging.

Problem 1: Fair Value Calculation (Cost of Carry)

Question:

• Spot price of Gold = ₹ 50,000.
• Interest Rate (r) = 10% p.a.
• Storage Cost = ₹ 500 per year.
• Calculate the Fair Price of a 6-month Futures contract.

Solution:

1. Formula: F = Spot + Interest + Storage.
2. Interest Cost: 50,000 × 10% × (6/12) = ₹ 2,500.
3. Storage Cost: 500 × (6/12) = ₹ 250.
4. Total Cost of Carry: 2,500 + 250 = ₹ 2,750.
5. Fair Future Price: 50,000 + 2,750 = ₹ 52,750.

Problem 2: Profit/Loss Calculation

Question:

• Trader buys 2 Lots of Nifty Futures @ 20,000.
• Lot Size = 50.
• On Expiry, Nifty closes at 19,800.
• Calculate Net Profit/Loss.

Solution:

1. Position: Long (Buy). He wants price to rise.
2. Movement: Price fell from 20,000 to 19,800. Loss is 200 points.
3. Loss per Lot: 200 points × 50 qty = ₹ 10,000 Loss per lot.
4. Total Loss: 2 Lots × ₹ 10,000 = ₹ 20,000 Loss.

Problem 3: Perfect Hedge Example

Question:

• Exporter expects to receive $10,000 in 3 months.
• Current Spot = ₹ 80.
• He sells USD-INR Futures @ ₹ 82 to hedge.
• After 3 months, Spot becomes ₹ 75. Show how he is protected.

Solution:

1. Loss in Spot Market:
   • Expected Rate: ₹ 80 (or 82). Actual Rate: ₹ 75.
   • Loss = (82 - 75) = ₹ 7 per dollar.
   • Total Business Loss = 10,000 × 7 = ₹ 70,000.
2. Gain in Futures Market:
   • He Sold at 82.
   • On expiry, price is 75 (Since Spot = Future).
   • He buys back at 75. Profit = 82 - 75 = ₹ 7.
   • Total Futures Profit = 10,000 × 7 = ₹ 70,000.
3. Net Result: Market Loss is cancelled by Futures Profit. Net effective rate = ₹ 82.

4. Exam Notes: Common Mistakes

1. Lot Size: Always multiply the point difference by the Lot Size to get Rupee profit.
2. Short Position: Remember, if you Sell (Short) at 100 and price falls to 90, you make a Profit of 10. Students often confuse this.
3. Time: Always convert months to X/12 years for interest calculation.

5. Quiz Time! 🎯

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