trading mach

8/6/2019 Trading Mach

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TRADING MECHANICS IN INDIAN DERIVATIVE MARKET

A) SPOT MARKET:

In a spot market transactions are settled on the spot. Once a trade is agreed

upon, the settlement-i.e. the actual exchange of money for goods takes place

with minimum possible delay.

There are two real-world implementations of a spot

market rolling settlement and real time gross settlement (RTGS). With rolling

settlement trade are netted through one day, and settled X working days later,

this is called T+X rolling settlement. For example: with T+5 rolling settlement,

traders are netted through Monday, and the ne t open position as of Monday

evening is settled on the coming Monday. Similarly, traders are netted throughTuesday, and settled on the coming Tuesday. With RTGS, all trades settle in a

few seconds with no netting. Rolling settlement is a close approximati on and

RTGS is a true spot market.

B) FORWARD TRANSACTION:

In a forward contract two parties irrevocably agree to settle a trade at a future

date for a stated price and quantity no money changes hands at the time the

trade is agreed upon.

Suppose a buyer Rajeshwari and seller Ranbir agrees to do a trade in 100 grams

of gold on 31dec 2009 at Rs 15000/- tolas. Here Rs. 15000/- tola is the

forward price of 31dec 2012 gold. The buyer Rajeshwari is said to be long

and the seller Ranbir is said to be short. Once the contract has been entered into

Rajeshwari obligated to pay Ranbir Rs.150k on dec31, 2012 and take delivery

of 100tolas of gold. Similarly ranbir is obligated to be ready to accept Rs.150k

on 31, dec and give 100 tolas of gold in exchange.

C) EXCHANGE TRADE V/S OTC DERIVATIVES:

The OTC derivatives markets have the following features compared to exchange -traded derivatives:

1. The management of counter-party (credit) risk is decentralized and located withinindividual institutions,

2. There are no formal centralized limits on individual positions, leverage, ormargining,


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3. There are no formal rules for risk and burden -sharing,

4. There are no formal rules or mechanisms for ensuring market stability

and integrity, and for safeguarding the collective interests of marketparticipants, and

5. The OTC contracts are generally not regulated by a regulatory authority and theexchange's self-regulatory organization, although they are affected indirectly bynational legal systems, banking supervision and market surveillance.

D) CARRY FORWARD:Badla is a mechanism to avoid the discipline of a spot market; to do trade onthe spot market but not actually do settlement. The carry forward activiesmarket a well functioning spot market has no possibility of carry forward.Derivative trade take place distinctively from the spot market. The spot price isseparately observed from the derivative price. A modern financial systemconsists of a spot market, which is a genuine spot market and a derivativemarket is separate from the spot market.

E) INTERMEDIATION IN INDIAN DERIVATIVE MARKET:There are two kinds of brokerage firms on the index future market,tradingmembers (TMs) and clearing members. NSCC bears the full of default by aclearing member. Trading members obtain the right to trade through a clearingmember; the CM adopts the full credit risk of the TM. If a TM fails, NSCC holdsthe relevant CM responsible.

F) MARGIN MONEY:

The aim of margin money is to minimize the risk of default by either country -party. The payment of margin ensures that the risk is limited to the previous days

price movementon each outstanding position.Margin is money deposited by the

buyer and the seller to ensure the integrity of the contract. Normally the margin

requirement has been designed on the concept of VAR at 99% levels. Based on the

value at risk of the stock/index margins are calculated. In general margin ranges

between 10-50% of the contract value. PURPOSE

The purpose of margin is to provide a financial safeguard to ensure that traders willperform on their contract obligations.

TYPES OF MARGIN

INITIAL MARGIN:

It is a amount that a trader must deposit before trading any futures. The initial margin

approximately equals the maximum daily price fluctuation permitted for the contract

being traded. Upon proper completion of all obligations associated with a traders

futures position, the initial margin is returned to the trader.


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OBJECTIVE

The basic aim of Initial margin is to cover the largest potential loss in one day. Both

buyer and seller have to deposit margins. The initial margin is deposited before the

opening of the position in the Futures transaction.

MAINTENANCE MARGIN:

It is the minimum margin required to hold a position. Normally the maintenance is

lower than initial margin. This is set to ensure that the balance in the margin account

never becomes negative. If the balance in the margin account falls below the

maintenance margin, the investor receives a margin call to top up the margin

account to the initial level before trading commencing on the next level.

ADDITIONAL MARGIN:

In case of sudden higher than expected volatility, additional margin may be called for

by the exchange. This is generally imposed when the exchange fears that the

markets have become too volatile and may result in some crisis, like payments crisis,

etc. This is a preemptive move by exchange to prevent breakdown

.CROSS MARGINING:This is a method of calculating margin after taking into account combined positions inFutures, options, cash market etc. Hence, the total margin requirement reduces dueto cross-Hedges.

MARK-TO-MARKET MARGIN

It is a one day market which fluctuateson daily basis and on every scr ip properevaluation isdone.


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Thi i the sample termi al of reliance money with help ofthis terminal

broker/ ealer can traded online or offline in the market The above sample

shows the option index trading of S&P C NIFTY. It shows the different

option price i.e atthe money, in the money, out ofthe money, deep in the

money and deep out ofthe money.

trading mach

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