Carrying cost in a Futures Contract

[Loss_Lover]

Hi All,

Wishing you a great profitable new financial year!

I am very new to futures trading and need clarification on this cost.

I understand that delivery margins are different from intraday margins. My questions are on a different note.

1. Let's say in a delivery futures contract the price goes in the opposite direction of the entry increasing the margin requirements than the initial (original) margin. What is going to happen, if the trader neither squares-off the position nor adds more margin to the account expecting the trade to reverse and go as per his call? In this case, will the broker adjust the initial entry price (against the trade call) to meet the margin requirements? Please explain.

2. Let's say in a delivery futures contract the price goes in the direction of the entry. And the trader is not exiting. Due to any unknown reasons, can the margin requirements increase than the initial (original) margin? If yes, please explain with scenarios.

Many thanks!

 

[travi]

Hi All,

Wishing you a great profitable new financial year!

I am very new to futures trading and need clarification on this cost.

I understand that delivery margins are different from intraday margins. My questions are on a different note.

1. Let's say in a delivery futures contract the price goes in the opposite direction of the entry increasing the margin requirements than the initial (original) margin. What is going to happen, if the trader neither squares-off the position nor adds more margin to the account expecting the trade to reverse and go as per his call? In this case, will the broker adjust the initial entry price (against the trade call) to meet the margin requirements? Please explain.

2. Let's say in a delivery futures contract the price goes in the direction of the entry. And the trader is not exiting. Due to any unknown reasons, can the margin requirements increase than the initial (original) margin? If yes, please explain with scenarios.

Many thanks!

Q1. Most brokers have their RMS programmed to square-off all positions as soon as your margin approaches / hits 0.
There is no adjustment that can be done against initial entry price.
If you have an understanding with the broker (most local brokers allow this but it is based on many sureties of various kinds) then they'll provide extra margin just like a loan. Its not as easy as it sounds here to get it overnight.

Q2. Your unrealized MTM does get added to Total Margin and therefore you will be able to avail it as extra margin.

 

[Loss_Lover]

Q1. Most brokers have their RMS programmed to square-off all positions as soon as your margin approaches / hits 0.
There is no adjustment that can be done against initial entry price.
If you have an understanding with the broker (most local brokers allow this but it is based on many sureties of various kinds) then they'll provide extra margin just like a loan. Its not as easy as it sounds here to get it overnight.

Q2. Your unrealized MTM does get added to Total Margin and therefore you will be able to avail it as extra margin.

Thank you!

So, for a futures contract meet the initial required margin and pay the following charges for both entry and exit:

BROKERAGE
STT/CTT
TRANSACTION CHARGES
GST
SEBI CHARGES
STAMP CHARGES

Then, if the trade goes against the entry meet the additional margin to add more onto the ongoing loss with a profit expectancy (very dangerous) or else book the loss and go home.

Am I correct? Would you like to add any other cost to a overnight futures contract which I missed to mention here.

 

[travi]

Thank you!

So, for a futures contract meet the initial required margin and pay the following charges for both entry and exit:

BROKERAGE
STT/CTT
TRANSACTION CHARGES
GST
SEBI CHARGES
STAMP CHARGES

Then, if the trade goes against the entry meet the additional margin to add more onto the ongoing loss with a profit expectancy (very dangerous) or else book the loss and go home.

Am I correct? Would you like to add any other cost to a overnight futures contract which I have not mentioned here.

initial margin depends on the trade,
if you've opted for MIS, you need to meet intraday margin requirement and order will auto-square-off near EoD.
if its NRML, its the option selected for overnight carry which is higher margin.

Margins are calculated by brokers differently and also vary from time to time depending on volatility. Margins requirements don't implicitly consider the overheads you've mentioned (commissions/taxes), i think if you're on the run, that part is a brokers loss but again it depends on how the RMS has been designed which I personally don't have a clue about.

 

[Loss_Lover]

Got it!

 

[Loss_Lover]

initial margin depends on the trade,
if you've opted for MIS, you need to meet intraday margin requirement and order will auto-square-off near EoD.
if its NRML, its the option selected for overnight carry which is higher margin.

Margins are calculated by brokers differently and also vary from time to time depending on volatility. Margins requirements don't implicitly consider the overheads you've mentioned (commissions/taxes), i think if you're on the run, that part is a brokers loss but again it depends on how the RMS has been designed which I personally don't have a clue about.

But then won't a trader need to bear the cost-of-carry for delivery futures contract per lot on top of the brokerage and taxes? How this cost-of-carry can be calculated to better mitigate the risks before entering into a futures position.

Appreciate your kind help!

 

[travi]

can you be more specific by what you mean?
Sometimes ppl tend to read a lot of online stuff and i'm also limited to knowledge about F&O on NSE.

If you're exchange specific, i'm not sure, but on NSE the cost-of-carry is priced in the futures premium which theoretically decays towards expiry and almost touches spot on or before expiry day. At that time, you can see the forward contracts commanding more premium.
in short there is no additional cost-of-carry.
You need margin, take a position (long or short), close it when you want and pay overheads(commissions). You can calculate at any brokers website.

 

[bpr]

But then won't a trader need to bear the cost-of-carry for delivery futures contract per lot on top of the brokerage and taxes? How this cost-of-carry can be calculated to better mitigate the risks before entering into a futures position.

Appreciate your kind help!

there is no cost of carry for overnight holding a Futures position .. you can hold a position till the expiry which is upto a month ..after that either you rollover to next month contract or if you leave it it will be cash settled.

 

[timepass]

there is no cost of carry for overnight holding a Futures position .. you can hold a position till the expiry which is upto a month ..after that either you rollover to next month contract or if you leave it it will be cash settled.[/QUOTE]

What exactly is the meaning of "Cash Settled" ?? Sorry for the dumb question

 

[bpr]

cash settled means the contract is settled between buyer and seller by cash using underlying cash scrip/ cash index last closing price.
instead of exchanging actual goods...(also known as physical settlement which is waht sebi wants now )