Derivative Analysis

Spot Price: Price at which an asset trades in the spot market

Futures price: Price at which futures contract trades in the futures market

Contract cycle: Period over which a contract trades Derivatives contracts have one, two and three months expiry cycles, Contracts expire on last Thursday

Expiry date: Date specified on the derivatives contract, It’s the last Thursday and the last day for the contract to be traded. Contract will cease to exist from this day.

Contract size: Quantity of asset that has to be delivered under one contract

Basis: It is the difference between futures and spot. Theoretically basis is always positive

Cost of carry: It measures the interest cost that is paid to finance the asset less the income earned on that asset

Initial margin: Amount that must be deposited in the margin account in order to initiate a futures position

Mark to Market (MTM) margin: In futures, at the end of each trading day, the margin account is adjusted to reflect the investors’ gain or loss depending upon the futures closing prices. This adjustment is called MTM

Maintenance Margin: This is lower than the initial margin. This margin is set to ensure that the balance in the margin account never becomes negative.           If the balance falls below maintenance margin, margin call is made. Trader is expected to top up the margin account to the initial margin level.