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Payoff for Futures

A payoff is the likely profit loss that would accrue to a market participant with change in the price of the underlying asset. Futures contracts have linear payoffs. In simple words, it means that the losses as well as profits, for the buyer and the seller of futures contracts, are unlimited. The payoff for futures, that is, for buyers (long futures) and sellers (short futures) is discussed below.

Payoff for Buyer of Futures: Long Futures

The payoffs for a person who buys a futures contract is similar to the pay off for a person who holds an asset. He has a potentially unlimited upside as well as downside. Take the case of a speculator who buys a two month Nifty index futures contract when the Nifty stands at 1220. The underlying asset in this case is the Nifty portfolio. When the index moves up the long futures position starts making profits and when the index moves down it starts making losses.

Payoff for Seller of Futures: Short Futures

The payoff for a person who sells a futures contract is similar to the payoff for a person who shorts an asset. He has a potentially unlimited upside as well as down side. Take the speculator who sells a two month Nifty index futures contact when the Nifty stands at 12.20. The underlying asset in this case is the Nifty portfolio. When the index moves down the short futures position starts making profits and when the index moves up, it start making losses.

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