Post-Agreement Scenarios: Navigating Futures Contract Outcomes

Evaluating Potential Market Trajectories

Following agreement establishment, three distinct outcomes may materialise by 24th December 2014, mirroring the analytical framework examined in the opening chapter: TCS prices may appreciate, depreciate, or remain static. Let us scrutinise these potential scenarios and their corresponding impacts upon participating parties.

First Scenario: Share Price Appreciation by 24th December

Should the bullish TCS assessment prove accurate, profitable returns materialise accordingly.

Assuming TCS spot prices advance from ₹2,374.90 to ₹2,450 per share by 24th December 2014, futures prices would experience proportional appreciation. The contractual agreement permits acquiring 125 shares at ₹2,374.90—substantially below prevailing market rates—yielding a per-share profit of ₹75.10 (₹2,450 minus ₹2,374.90). Total transaction profit equals ₹9,387.50 (₹75.10 multiplied by 125 shares).

The counterparty seller clearly experiences disadvantage, obligated to dispose of TCS shares at ₹2,374.90 per share rather than capitalising upon the ₹2,450 open market valuation. Evidently, the buyer’s profitable position derives directly from the seller’s unfavourable circumstances.

Second Scenario: Share Price Depreciation by 24th December

Should the TCS assessment prove erroneous, losses become inevitable.

If TCS share prices declined from ₹2,374.90 to ₹2,300 per share by 24th December 2014, futures prices would mirror this depreciation trajectory. The contractual obligation necessitates purchasing TCS shares at ₹2,374.90 per share—exceeding current market rates—resulting in a per-share loss of ₹74.90 (₹2,374.90 minus ₹2,300). Having committed to acquiring 125 shares, total losses amount to ₹9,362.50 (₹74.90 multiplied by 125 shares).

The position holder clearly faces disadvantage, compelled to purchase TCS shares at ₹2,374.90 instead of the ₹2,300 open market rate. Evidently, circumstances advantageous to the seller prove detrimental to the buyer.

Third Scenario: Share Price Stability

Under circumstances where prices remain unchanged, neither buyer nor seller derives advantage, resulting in neutral financial impact for both parties.

Capitalising Upon Trading Opportunities

Consider this development: following the TCS futures purchase on 15th December 2014 at ₹2,374.90, next-day prices surged to ₹2,460. This favourable movement generates a per-share profit of ₹85.10, totalling ₹10,637.50 (125 shares multiplied by ₹85.10) in unrealised gains.

Whilst satisfaction exists regarding overnight profits, a critical question emerges: if market perspectives shift at ₹2,460 per share, must the position remain held until 24th December 2014 expiry? Should prices subsequently retreat, would losses materialise?

As previously established, futures contracts possess transferability characteristics. This attribute permits exiting agreements at any juncture, enabling realisation of the ₹10,637.50 single-day profit. Quite remarkable returns for minimal duration exposure.

Understanding Position Closure Mechanics

Closing existing futures positions is termed ‘squaring off’. This process offsets open positions—regarding TCS, having initially purchased one lot of TCS futures necessitates selling one lot to neutralise the original acquisition. The following framework summarises this concept:

Offsetting Actions:

Initial Position: Buy 1 lot TCS futures

Closing Position: Sell 1 lot TCS futures

Result: Position neutralised

Upon deciding to close the TCS futures position, two execution methods exist: contacting the broker with instructions to cover the open transaction, or self-executing through the trading terminal. For instance, having bought one lot of TCS futures, the offsetting action involves selling one lot of identical futures. Consequently, these developments occur:

Step One—Counterparty Identification: The broker identifies another participant through the trading terminal willing to assume the futures position. Essentially, TCS price fluctuation ‘risk’ transfers to this alternative party rather than the original holder, signifying the current buy position has been reassigned. This constitutes ‘Risk Transfer’.

Step Two—Market Rate Transaction: The transfer executes at prevailing market trading rates, specifically ₹2,460 per share.

Step Three—Position Neutralisation: Upon trade completion, the position becomes balanced (or neutralised).

Step Four—Margin Release: Following trade settlement, previously blocked margin funds become accessible, enabling deployment towards alternative transactions.

Step Five—Immediate Account Settlement: Transaction outcomes receive instant application to the trading account that same evening.

The futures trade achieves finalisation.

Evaluating Alternative Holding Strategies

Had a constructive perspective on TCS persisted at ₹2,460, retaining stock futures until 24th December 2014 expiry would have been viable. Inherent risk accompanies this continuation, as TCS prices remain subject to fluctuation. The quotation on 23rd December 2014 registered ₹2,519.25 per share—had the position been maintained until that juncture, profits would have substantially exceeded those from earlier liquidation.

The decision to realise profits by selling TCS futures at ₹2,460 on 16th December 2014 transferred the buy position to another individual, who potentially generated returns by holding the contract until 23rd December 2014. This development prompts two pertinent questions:

Calculating per-share profit and loss: had TCS futures been held from 15th December 2014 through 23rd December 2014, total gains would equal ₹144.35. On an aggregate basis, profit would correspond to share price appreciation of ₹144.35.

Upon closing the TCS futures position at ₹2,460 on 16th December 2014, what profit and loss—both per-share and aggregate—would the counterparty assuming the squared contract have realised had they maintained their position until 23rd December 2014?

These queries warrant thorough examination in forthcoming chapters, alongside exploration of profit calculation methodologies and strategic position management techniques essential for successful futures trading outcomes.

Risk Management Considerations

Understanding these scenarios underscores the importance of developing robust risk management frameworks when participating in futures markets. Whilst leverage amplifies potential returns, it simultaneously magnifies exposure to adverse price movements. Disciplined approach to position sizing, stop-loss implementation, and profit-taking strategies proves essential for sustainable trading performance across varying market conditions.