Future Contract

Dr. Subhendu Kumar Pradhan

Specification of Future Contract
Underlying assets: commodities, stocks, currencies, interest rates and bond.
• If asset is commodity- Quality variation
• Future contract must specify the grade and grades of a commodity that can
be delivered under this contract.
• IF we want peruse a Cashew future contract, National commodity and
Derivative Exchange – Specified quality in the terms of color and others
characteristic such as count/454gram, moisture, and broken allowed.
• If it is financial Asset – it should be specifies under the contract- Currency
US dollers, BSE Sensex Future, S and P CNX Nifty Index Future.
Examples
Types of Futures Contracts

• Futures contracts can be used to set prices on any type of commodity or asset, so long as
there is a sufficiently large market for it. Some of the most frequently traded types of
futures are outlined below:
• Agricultural Futures: These were the original futures contracts available at markets like
the Chicago Mercantile Exchange. In addition to grain futures, there are also tradable
futures contracts in fibers (such as cotton), lumber, milk, coffee, sugar, and even
livestock.
• Energy Futures: These provide exposure to the most common fuels and energy products,
such as crude oil and natural gas.
• Metal Futures: These contracts trade in industrial metals, such as gold, steel, and copper.
• Currency Futures: These contracts provide exposure to changes in the exchange rates
and interest rates of different national currencies.
• Financial Futures: Contracts that trade in the future value of a security or index. For
example, there are futures for the S&P 500 and Nasdaq indexes. There are also futures
for debt products, such as Treasury bonds

Contract Size
• The Contract size is amount
of the assets need to be
deleiverable under the
contract
• I contract = 50 units of nifty
fifty
https://www1.nseindia.com/products/content/derivatives/equ
ities/bank_nifty_new.htm
Bank Nifty Futures Contract Specifications
Ticker Symbol BANKNIFTY
Contract Size 40 units.
Contract size multiplied by the index level (For example: if the current
Notional value index value is 1000 then the notional value would be 10000 x 25 = Rs.
2,50,000)
Tick Size 0.05
Trading Hours As in equity derivative segment
BANKNIFTY futures contracts expire on the last Thursday of the expiry
Expiry Date month. If the last Thursday is a trading holiday, the contracts expire on
the previous trading day.
BANKNIFTY futures contracts have a maximum of 3-month trading
cycle - the near month , the next month and the far month. A new
Contract months
contract is introduced on the trading day following the expiry of the
near month contract.
Daily Settlement Price Last half hour's weighted average price
Final settlement price for a futures contract shall be the closing price
Final Settlement Price
of the underlying index in the Normal Market of the Capital Market
segment of National Stock Exchange on the last trading day of such
futures contract.
Final Settlement Final settlement will be Cash settled in INR based on final settlement
Procedure price
All open positions on expiry date shall be settled on the next working
Final Settlement day
day of the expiry date (T+1)
The trading member/MF/FII position limits in BANKNIFTY futures
contracts shall be higher of Rs.500 crores or 15% of the total open
Position Limits
interest in the market . This limit would be applicable on open
positions in all futures contracts on underlying index
Delivery Arrangement
1. The place where the delivery will be made must be specifies the by the exchange.
2. Commodity with significant transport cost
3. Exchange also may specified the alternative delivery options
4. Example NCDEX designated delivery centre for Cashew at Kollam and additional
delivery centre is designated Mangalore
5. Incase of Financial assets, Delivery is in the fore of book entry for example- The trader
open the account with clearing system. In case of delivery , Seller account will be
debited and buyer account will be credited with assets at the same time Cash will be
credited to Bank account of seller and cash will be debited of buyer account
6.
https://www.nseindia.com/products-services/about-equity-derivatives
Delivery Arrangement: Alternative Grade
• Any commodity or financial assets are different grade are available for
delivery- grade of assets should be adjusted with price of contract by
exchanges that may be dependent upon the grade chosen for the
delivery
• Any extra premium may be paid for delivery of High quality grade
• For exmples NCDEX , the gold contract specification is gold bar of
999.9/995 fineness
• A premium need to be paid of fineness above 995. Settlement price
of more than 995 will be calculated as (actual fitness/995)*Final
settlement price. Premium of 0.49 % is paid for gold delivered with
999.9 purity
Delivery Month
• A future contract is referred to by its delivery month
• Exchange must be specified the day of the month on which the
delivery can be made
• For example A peruse a contract on july on cashew the delivery date
is 2oth of the delivery month , if 2oth is to be holiday like Saturday or
Sunday, due date would be preceding trading day of the exchange.
Delivery Notification
• In the commodities futures markets, delivery notices are a document
provided by the seller of a futures contract
• . The document serves as confirmation that the seller intends to
honor their contract by physically delivering the underlying
commodity to the futures holder.
• By contrast, when a futures contract is cash settled no physical
delivery ever takes place.
Position limit
• Position limit refers to the maximum number of contract can be held
by a trader in the future
• The purpose of position limit is to prevent speculators from excersing
any influence on the market.
• https://www.nseindia.com/products-services/equity-derivatives-
position-limits#:~:text=Index%20Futures-
,The%20position%20limits%20of%20Trading%20members%20%2F%2
0FPIs%20(Category%20I),on%20a%20particular%20underlying%20ind
ex.
Arbitrage Between Future market and the
spot market
• Sell a futures contract at price F
• Buy the asset at spot price S
• Enfore the price future contract, that is make delivery at F
• Profits = if F-S ,
In case of Buy future contract
Profits= S-F
• Future gold contract is 13500 per 10 gram per gold gold, Spot price is
13800 per 10 gram gold during the tender offer, Contract size is 100
gram
• What transaction would take an arbitrage undertake
• What would be arbitrage profits
Clearing House
• Exchange clearing house is a Part of exchange
• Acted as intermediaries in all futures transaction
• Clearing house has number members i.e clearing member – registerd
broker
• Clearing house keep track record all transaction that taken place during the
day so that it ca be calculated net position of each of the CM
• Each CM is required to maintain the a margin account with clearing house
• Margin is some percentage of amount of the contract value that cleared
through CM
• CM has to pay Margin amount to Clearing House that is called clearing
margin i.e. Initial margin
Example
• A person want to buy a five cashew future contract
• Cashew contract margin is 5%
• Contract price of Cashew per carton is 5600
• Contract size is 50 carton
• Calculate the margin amount
Marking to market
• Once margin account is provided by trader, broker /CM will open
margin account for trader
• Broker maintain this margin account daily on basis of settlement price
of contract.
• Amount deposited by trader in the margin account is initial margin
• The Broker maintain margin account for each trader till trader close
out of position or expired the contract
• The process of updating the margin account in daily basis is called
marking to market.
Marking to Market
• In previous example, In the next day future price increases to 5640, what would
be the net gain from future contract need to be added to margin account
balance. Calculate net gain
• Similarly in the Next day suppose price fall to 5560, Net loss would be deducted
from margin account balance. Calculate net loss
• Whenever, the margin account balance shows an amount higher than initial
margin amount, The trader has option to with drawn the excess. But most of the
trader use to keep balance with margin account
• When the margin account balance decrease below the initial margin amount,
trader will not have to add money immediate. The clearing house also provide
minimum amount that should be available in the margin account at all times.
That minimum amount is called variance of margin or maintenance margin.
• The variance of margin equal to difference between the initial margin and
maintenance margin
• If the margin account balance decrease below the variance margin, broker will
have to notify the trader to add the money. This margin is know as a margin call.
Marking to Market
• If the trader, on receiving a margin call, does not proving the required
funds to the to the broker, the broker has the right to close out the
traders position and updated the margin account with gain and loss
made on closing out the position.
Problems of Margins see in the special PPT
Price quotes for future contract

https://www1.nseindia.com/live_market/dynaContent/live_wa
tch/fomwatchsymbol.jsp?key=NIFTY&Fut_Opt=Futures
Settlement Price
• Settlement price is normally average price at which the contract was
trades immediately before the end of trading for the day.
• Every exchange has their procedure for calculation of settlement price
on each day as well as on the expiry day
• Daily gain or loss, margin account balance are calculated based
settlement price
• In the NSE, settlement price is calculated on the basis of last half an
hours weighted average price.

https://www1.nseindia.com/products/content/derivatives/equ
ities/settlement_mechanism.htm
Open interest
• Open interest is the total number of outstanding derivative contracts, such
as options or futures that have not been settled for an asset.
• Number contracts available on the market
• Open interest keeps track of every open position in a particular contract,
rather than tracking the total volume traded in it, which may also included
netting or closing positions
• open interest can provide a more accurate picture of a contract's liquidity
and interest, identifying whether money flows into the contract are
increasing or decreasing
• Increasing open interest represents new or additional money coming into
the market while decreasing open interest indicates money flowing out of
the market.
Open Interest

https://www.nseindia.com/market-data/oi-spurts
 How to Trade in Future
• Step one – Trader will contact to authorized Broker to trade in futures
Order can be place market order or limit order.
• Step -2- The broker will access order book of the NCDEX and Key order
place by trader
• Step -3 Once order is matched, Order will be executed, the broker will then
have to get this cleared by CM of Clearing corporation of the exchange, CM
is responsible to exchange to fulfill the contract.
Broker ask to CM to clear trade, once CM is clear the trade, Exchange notify
the broker that the order has been cleared
• Step -4: In order to take the responsibility for fulfillment of the contract at
maturity , CM will have to post the margin which is based on volatility of
underlying asset price.
Then Exchange will notify to the CM that margin need to be posted
How to Trade in Future
• Step -5: Since CM only clear the trade and takes no position in the trade , they will ask
the broker to provide the funds for this margins which will be collected by trader from
the trader.
• Step-6: Broker will maintain the an account that is margin account, This account is
updated by broker on daily basis based on settlement price of the contract in that day
that is marking to market.
• Step 7: As long as trader wants to keep their position in the future before maturity, Only
his responsibility to follow the broker instruction and need to be updated the margin
account
• Step 8 At the Maturity the contract will be settled. Settlement price will calculated by
NCDEX and will be know to all broker.
The broker will calculate the profit or loss (Surplus or negative) of margin account
based on settlement price. IF MA is positive, that is called gain will be tranfered by broker
to trader bank account. IF MA is negative, i.e is loss need be paid by trader to broker.
• All the future exchanges allow the online trading by individual traders directly