Futures

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kaushal (Querist)
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22 April 2009 suppose I enter to into futures contract can I enter into buy & sell futures contracts? on expiry of futures contract how is P/l genereated ie how rates are determined?wht is open interest & open position?wht is square off?

CA. Pradeep Jhawar

CA. Pradeep Jhawar (Expert)
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01 May 2009 Hi Kaushal,

In a future contract you can enter into either side of it, i.e., buy or sell. It depends upon your outlook for underlying security/commodity, for e.g., if you feel that share price of State Bank of India will fall you can sell the future contract for SBI. When you execute sell order there must have been some fellow buying it on the exchange, so it forms a two party contract.
On the expiry of the contract, usually on the last working thursday of the month, the closing price of the underlying security on that day will form as price for determining ur final profit/ loss.

Example 1:: I purchased SBI April future (lot size = 200) @ 1000 on 20th April 2009. On expiry, closing price of SBI shares is Rs 1100.
My profit = Rs (1100-1000)*200= Rs 20000

Example 2:: I sold SBI April future (lot size = 200) @ 1000 on 20th April 2009. On expiry, closing price of SBI shares is Rs 1100.
My Loss = Rs (1100-1000)*200= Rs 20000

****Closing price of share on the date of expiry is determined by the method of weighted avg' price of the share in the last half hour of trading.
****from the date of entering future contract to the date of expiry, there will Mark to Market settlement on the daily basis, unless contract is squared off.

Square Off is taking position opposite to earlier position, i.e., if you have been in bought futuree then sell it and if you have sold the future than buy it.

Open Interest/Open Position of security is net outstanding future contract at particular time. (**One person sell, other buy = Addition of 1 contract in Open Interest)

Kindly revert if you want to know more or for any clarification.