Basics about Futures & Options

Please can anyone tell what will happen in the following situation?

Eg:- Suppose, A bought a call at a strike price of Rs 500. On expiry the price of the asset is Rs 450. A will not exercise his call. Because he can buy the same asset from the market at Rs 450, rather than paying Rs 500 to the seller of the option.

So, in the above example, since A is not exercising his call, will there be a penalty on him?
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P.S. :-Can anyone suggest a good book about Futures & Options which describes things in a layman's language with examples to understand things better about F&O.

Question about Futures Contract

Correct me if i am wrong, i am totally confused about this thing

As i understand the basic definition of a Futures Contract is to hedge against the fluctuation in prices.

So, if Mr.X enters into a futures contract for the month of November to purchase 10 lots of ABC Ltd. for Rs.1000(strike price?). The spot price(current market price?) is Rs.900 and in november the market price of wheat is Rs.1500.

From the above example, how does a futures contract works?

Mr.X will be buying ABC Ltd for Rs.1000 in november? How does he gain from this?

First of all there wont be any penalty.

Second there will be no point in excersing as his option value will be '0' as call is OTM

Dear Vmonu,

Future and Option both are different concepts.
In option we have to pay premium not asset price. strike price only comes in option not in future. In your eg stike price is mentioned so i consider it as an option example. In option premium is Important and its not mentioned.

Consider premium is 70.

Then If he purchase Option, strike price 1000 , spot 900, Premium 70 and during expire spot closes at 1500 then he will earn

Profit = 1500 - ( 1000 + 70) = 430 * lot size

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If this is future he purchased at 1000 and contract expire at 1500 then he will earn

Profit = 1500 - 1000 = 500 * lot size

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the spot is at 1,000 and the three-month (December) futures at 1,105. To protect your Rs 2 lakh portfolio from a slide in the market, you sold 200 December futures. On the contract expiry date, the spot is at 900, down 10 per cent. Your futures transaction earns you a profit of Rs 23,000 [200x(1,015-900)], which compensates you fully for the Rs 20,000 (10 per cent) depreciation in your portfolio.

However, if the future goes up, your futures transaction starts posting a loss. If the future is up 10 per cent, at 1,100 on expiry date, your loss on the futures transaction would be Rs 17,000. However, your portfolio would have gained Rs 20,000, leaving you adequately hedged.

Thanks, i guess i have grasped some things about F&O:

In futures we pay the margin money and in options we pay a premium.
In futures we have purchase price and expiry price(or is it price on expiry date?), while in options we have Spot Price, Strike Price and Expiry Price.

So, considering this as a future contract and according to futures definition...isn't futures done to hedge? or is it done more to speculate?

Isn't futures the same as a forward contract which is done through stock exchange?
and according to forwards contract a person gets into a forwards contract when there is a need to hedge something so as to save himself from price fluctuations.
So, suppose Mr.Y buys 10 kg wheat for Rs.1000 as a forward contract for November and due to increase in demand in november for wheat the price shoots up to Rs.2000 for 10kg. So, Mr. Y saved himself from the variation in price.

So, in the same way as forwards contract, in futures, we do trading through stock exchange and if we replace wheat some stock, with some company, PQR Ltd.
So, we will buy the futures contract(10 lots) for Rs. 1000 ? How will we gain profit from this?

Correct me if i am wrong in interpreting this thing...

Also, can you please suggest a good book about Futures & Options which describes things in a layman's language with examples to understand things better about derivatives(F&O).