general awareness

 Trading Futures To understand futures trading and profit/loss that can occur while trading, knowledge of pay-off diagrams is necessary. Pay-off refers to profit or loss in a trade. A pay-off is positive if the investor makes a profit and negative if he makes a loss. A pay-off diagram represents profit/loss in the form of a graph which has the stock price on the X axis and the profit/ loss on the Y axis. Thus, from the graph an investor can calculate the profit or loss that his position can make for different stock price values. Forwards and futures have same pay-offs. In other words, their profit/loss values behave in a similar fashion for different values of stock price. In this chapter, we shall focus on pay-offs of futures contracts. Pay-off of Futures The Pay-off of a futures contract on maturity depends on the spot price of the underlying asset at the time of maturity and the price at which the contract was initially traded. There are two positions that could be taken in a fu...