Topic 5/8: Derivatives
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Topic 5/8: Derivatives
In case of future’s contact…..why only interest cost of initial margin is deducted from net realisation…not the whole initial margin….
Interest is deducted because you lost the opportunity of earning interest income on the amount of initial margin when you entered into the future contract. That’s an opportunity cost.
On the other hand, the amount of initial margin will be refunded to you on maturity of the contract. So you’ll get that amount back (without any interest). It is not a cost for you.
Only the interest foregone is an opportunity cost.
Because interest margin is refundable
At 8:14 Arbitrage Profit topic was suddenly discontinued I am Continuing it Further
Formula Is –
F = S + Interest – Dividend
By using above formula we get Theoritical Future Rate and by comparing Theo F by Actual F we decide which strategy we have to use. Following Scenarios are available-
1.- If Actual F > Theo F
Than the Futures are Overpriced hence we will be Bearish and do F- and to arrange for it we will do S+ and to arrange for S+ we will Borrow so the Strategy goes like S+, F- and Borrow at Rf.
2. – If Actual F < Theo F
Than the Futures are Underpriced hence we will be Bullish and do F+ and to arrange for it we will do S- and to arrange for S- we will Invest so the Strategy goes like S-, F+ and Invest at Rf.
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