I had a long position in FUT but I was at a loss so I decided to take physical settlement and did not close my long FUT position. Now, I have received the physical delivery of the shares but at the same time in my FnO statement shows a loss for my same long FUT position.
What is the point of taking physical delivery?? I took physical settlement only so that I can avoid the FnO loss.
But I ended up taking the physical delivery as well as paying a loss in my FUT long position.
Can someone please explain to me if this calculation is correct??
Let us try to explain it with an example.
You bought the future at Rs.100 and carried it till expiry.(MTM settlement happens every day based on price movement)
On expiry day share price settled at Rs.80.
So you already realized the loss of Rs.20 (100-80)
You will receive the shares at Rs.80 after the expiry of the contract as you have taken physical delivery. Now you can wait for the shares to move up if you want to recover the loss or you can sell it off at the available market price.
Though I know how it actually works, technically I find it wrong.
First we need to understand futures and options are contracts between two parties.
In case of future, it is a forward contract to buy and sell predetermined quantity of shares at a predetermined price on a predetermined date. The market price on the date of settlement is actually not relevant when there is a contract.
Lets say I get into a contract to buy land at Rs.1crore after 5 years from this date. After 5 years the price of the land is irrelevant when I actually buy it. And when I sell the land my cost of acquisition is still 1Cr.
Futures are also forward contracts which are regulated by stock market and same logic should hold good.
So in the above example stated, my cost of acquisition should be 100 and not 80.
I always had this thought. If anybody has any specific reason for calculating it otherwise kindly correct me.
Yes, it is totally wrong. Physical settlement absolutely makes no sense if we have to pay the loss as well as buy the shares. I am stuck with these shares as well as I had paid the FUt loss
The net effect is still the same.
Infact it is tax efficient since we get business loss and when we sell the shares we get short term capital gain.
Business profit is taxed at 30 percent and STCG is at 15 percent.
I just don’t understand the logic behind it.
