MECHANICS

OF FUTURES
MARKET
 Clearing house

• A clearing house acts as an intermediary between a buyer and seller and

seeks to ensure that the process from trade inception to settlement is
smooth. 

• Clearing houses act as third parties to all futures and options contract, as

buyers to every clearing member seller, and as sellers to every clearing
member buyer.
 At present, there are five clearing corporations
operational in India, namely-

• Indian International Clearing Corporation (IFSC) Limited

• Indian Clearing Corporation

• Metropolitan Clearing Corporation of Indian Limited

• National Securities Clearing Corporation Limited

• NSE IFSC Clearing Corporation Limited

Margin

A margin is cash or marketable securities deposited by an investor with his or her

broker. The balance in the margin account is adjusted to reflect daily settlement.

Margins Move with the Markets

• When markets are changing rapidly and daily price moves become more
volatile, market conditions and the clearinghouses' margin methodology may
result in higher margin requirements to account for increased risk.

• When market conditions and the margin methodology warrant, margin

requirements may be reduced.
There are two types of margins:

•The initial margin

This is the amount that every trader much deposit with the broker in order to
open an account short or long.

•The maintenance variable margin

This is minimum level of trader equity in the margin account if the trader's
equity Falls below this level The Reader will receive a Margin Call requiring
the trader to deposit more money and bring the account to its initial level.
Otherwise the position will be closed
Market Participants
• Hedgers

• Speculators

• Margin traders

• Arbitragers
Lot Size
When it comes to the futures market, lots are known as contract sizes. The
underlying asset of one futures contract could be an equity, a bond, interest
rates, commodity, index, currency, and so on. Therefore, the contract size varies
depending on the type of contract that is traded.

•A lot is the standardized number of units in which a financial instrument

trades.

•Shares trade in 100 share units, called round lots, but can also be traded in odd
lots.

•A trader can buy or sell as many futures as they like, although the underlying
amount that contract controls is fixed based on the contract size.
Expiry
 The exchange has decided that the contracts can only expire on the last
Thursday of every month. If this happens to be a trading holiday, then the
previous trading day would be counted as the expiry date.

Duration of future contract

Futures have three contract series open for futures trading at any point in
time – the near-month (1 month), middle-month (2 months) and far-month
(3 months) index futures contracts.
Price Limit
• Price limits are the maximum price range permitted for a futures contract in
each trading session.

• These price limits are measured in ticks and vary from product to product.

• When markets hit the price limit, different actions occur depending on the
product being traded.

• Some markets may temporarily halt until price limits can be expanded or
trading may be stopped for the day based on regulatory rules.

• Different futures contracts will have different price limit rules

 Payoff
A payoff is the likely profit loss that would accrue to a market participant with change in the price of the
underlying asset.

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.
• Take the case of a speculator who buys a two month Nifty index futures contract when the Nifty stands at
1220.
• 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.
• Take the speculator who sells a two month Nifty index futures contact when the Nifty stands at 12.20.
• When the index moves down the short futures position starts making profits and when the index moves up,
it start making losses.
For Example : The lot size of Titan is 750. Here is a sample trade. If
you buy one future of Titan, you technically buy 750 shares of
Titan. This effectively means one rupee movement in Titan will
give you + or - 750 RS.

Leverage : Assuming Titan is trading at 1000 rs a share. You have to

pay 7,50,000 ( 1000*750) but in futures unlike delivery you get
leverage. Leverage differs with every brokerage. You usually get 10
times leverage. That means you can buy one lot of Titan futures
with 75,000.