Trade Details Qty bought/Sold Settlement Price MTM Brought forward
from
previous day
100@100
105 500
Traded during the day Bought Sold 200@100 100@102 102 200 Open position(not squared up) 100 @100 105 500 Total 1200
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The table gives the MTM charged on various positions. The margin charged on the brought forward contract is the difference between the previous day's settlement price of Rs.100 and today's settlement price of Rs.105. Hence on account of the position brought forward, the MTM shows a profit of Rs.500. For contracts executed during the day, the difference between the buy price and the sell price determines
the MTM. In this example, 200 units are bought @ Rs. 100 and 100 units sold @ Rs. 102 during the day. Hence the MTM for the position closed during the day shows a profit of Rs.200. Finally, the open position of contracts traded during the day, is margined at the day's settlement price and the profit of Rs.500
credited to the MTM account. So the MTM account shows a profit of Rs. 1200.
9.3
Final settlement for futures
On the expiry day of the futures contracts, after the close of trading hours, NSCCL marks all positions of a CM to the final settlement price and the resulting
profit/loss is settled in cash. Final settlement loss/profit amount is debited/ credited to the relevant CM's clearing bank account on the day following expiry day of the contract.
9.3.1
Settlement prices for futures
Daily settlement price on a trading day is the closing price of the respective
futures contracts on such day. The closing price for a futures contract is currently calculated as the last half an hour weighted average price of the contract in the F&O Segment of NSE. Final settlement price is the closing price of the relevant underlying index/security in the capital market segment of NSE, on the last trading day of the contract. The closing price of the underlying Index/security is currently its last half an hour weighted average value in the capital market
9.4 Settlement of options contracts
Options contracts have three types of settlements, daily premium settlement, exercise settlement, interim exercise settlement in the case of option contracts on securities and final settlement.
9.4.1 Daily premium settlement
Buyer of an option is obligated to pay the premium towards the options purchased by him. Similarly, the seller of an option is entitled to receive the premium for the option sold by him. The premium payable amount and the premium receivable amount are netted to compute the net premium payable or receivable amount
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for each client for each option contract.
9.4.2 Exercise settlement
Although most option buyers and sellers close out their options positions by an offsetting closing transaction, an understanding of exercise can help an option buyer determine whether exercise might be more advantageous than an offsetting sale of the option. There is always a possibility of the option seller being assigned an exercise. Once an exercise of an option has been assigned to an option seller, the option seller is bound to fulfill his obligation (meaning, pay the cash
settlement amount in the case of a cash-settled option) even though he may not yet have been notified of the assignment
9.4.3 Final exercise settlement
Final exercise settlement is effected for all open long in-the-money strike price options existing at the close of trading hours, on the expiration day of 100 an option contract. All such long positions are exercised and automatically assigned to short positions in option contracts with the same series, on a random basis. The investor who has long in-the-money options on the expiry date will receive the exercise settlement value per unit of the option from the investor who has been assigned the option contract.
The exercise settlement value for each unit of the exercised contract is computed as follows:
Call options = Closing price of the security on the day of exercise — Strike price Put options = Strike price — Closing price of the security on the day of exercise
For final exercise the closing price of the underlying security is taken on the expiration day. The exercise settlement value is debited / credited to the relevant CMs clearing bank account on T + 1 day (T = exercise date).
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10) Taxation of Profit/Loss on derivative transaction
in securities
Prior to Financial Year 2005–06, transaction in derivatives were considered as speculative transactions for the purpose of determination of tax liability under the Income -tax Act. This is in view of section 43(5) of the Income -tax Act which defined speculative transaction as a transaction in which a contract for purchase or sale of any commodity, including stocks and shares, is
periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. However, such transactions entered into by hedgers and stock exchange members in course of jobbing or arbitrage activity were specifically excluded from the purview of definition of speculative transaction.
In view of the above provisions, most of the transactions entered into in derivatives by investors and speculators were considered as speculative transactions. The tax provisions provided for differential treatment with respect to set off and carry forward of loss on such transactions. Loss on derivative transactions could be set off only against other speculative income and the same could not be set off against any other income. This resulted in payment of higher taxes by an assessee.
Finance Act, 2005 has amended section 43(5) so as to exclude transactions in derivatives carried out in a “recognized stock exchange” for this purpose. This implies that income or loss on derivative transactions which are carried out in a “recognized stock exchange” is not taxed as speculative income or loss. Thus, loss on derivative transactions can be set off against any other income during the year. In case the same cannot be set off, it can be carried forward to subsequent assessment year and set off against any other income of the
subsequent year. Such losses can be carried forward for a period of 8
assessment years. It may also be noted that securities transaction tax paid on such transactions is eligible as deduction under Income-tax Act, 1961.
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