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Base price

Also written Base rate for price band · Reference price for the day

The reference price a contract starts each trading day from — the theoretical futures price on the day it is introduced, and the previous day's daily settlement price on every day after.

In plain language

Before the market opens, every contract needs a number to be measured against. That number is the base price.

It does two jobs:

  1. It is the reference price for the start of the day — what the screen shows as the prior level a new day's trading moves away from.
  2. It is the anchor for the operating range — the percentage band outside which orders are rejected.

Where it comes from depends on the contract's age. On the first day a contract is introduced, there is no history, so the exchange uses the theoretical futures price computed from the spot rate and the interest differential. On every subsequent day it is the daily settlement price of the previous day, as computed by the clearing corporation.

So the base price is not a fresh calculation each morning. It is yesterday's settlement, handed forward.

How it works

The daily settlement price that becomes tomorrow's base price is itself the volume weighted average futures price of the last half hour of trading across exchanges — and if no such close price is available, the theoretical futures price instead. The chain is unbroken: theoretical price seeds the contract, settlement prices carry it forward, and a theoretical price steps in whenever trading is too thin to produce one.

The operating range is where the base price earns its keep. Currency futures have no daily price bands in the ordinary sense. What they have instead is a band designed to stop fat-finger orders:

  • ±3% of the base price for contracts with tenure up to 6 months
  • ±5% of the base price for contracts with tenure greater than 6 months

and the band is relaxed in increments of 1% as and when a market-wide trend is observed. Longer contracts get the wider band because they genuinely move more.

Currency options work differently: their operating range is computed from the delta of the contract using the previous close of the underlying and volatility, subject to a minimum range, recomputed daily and applicable from the next trading day.

The formula

Day 1 of a contract : Base price = Theoretical futures price
Every day after     : Base price = Previous day's daily settlement price

Daily settlement price = VWAP of the last 30 minutes across exchanges
                       , or the theoretical futures price if unavailable

Operating range = Base price × (1 ± 0.03)   tenure ≤ 6 months
                = Base price × (1 ± 0.05)   tenure > 6 months

All resulting prices are rounded to the tick of Rs 0.0025 (0.25 paise).

A worked example

It is March 2024, and two USDINR futures contracts are live.

The April contract, base price Rs 83.00. Tenure is under six months, so the band is ±3%:

83.00 × 0.03 = 2.49
Lower = 83.00 − 2.49 = 80.51
Upper = 83.00 + 2.49 = 85.49

Operating range Rs 80.51 – 85.49. An order keyed at 86.00 is rejected before it reaches the book.

The October contract, base price Rs 84.50. Tenure exceeds six months, so the band is ±5%:

84.50 × 0.05 = 4.225
Lower = 84.50 − 4.225 = 80.275
Upper = 84.50 + 4.225 = 88.725

Operating range Rs 80.275 – 88.725 — a band nearly twice as wide in rupee terms, from a base price only Rs 1.50 higher. The tenure, not the price, did that.

Next day. Suppose the April contract's last half hour produces a volume weighted average of 83.2500. That becomes the daily settlement price, and therefore tomorrow's base price:

83.2500 × 0.03 = 2.4975
New operating range = 80.7525 to 85.7475

Both limits are exact multiples of the 0.0025 tick. The band has walked up by 0.2475 at each end simply because the settlement moved 0.25.

And if the market trends. With a market-wide trend observed, the band is relaxed a percentage point at a time — 3% becomes 4%, and on a base of 83.2500 the range widens to 79.92 – 86.58.

In contract-value terms, the April band spans Rs 80.51 to Rs 85.49 on a lot of USD 1,000, or Rs 80,510 to Rs 85,490 of contract value — which is the size of erroneous order the check exists to stop.

Why NISM asks about it

The base price appears twice in the syllabus, and you need both. Chapter 3 (Exchange Traded Currency Futures) introduces it in the contract terminology alongside lot size, tick size, price band, mark to market and settlement prices, and it is listed as a line item in the contract specification tables for both rupee and cross-currency futures. Chapter 6 (Trading Mechanism), section 6.5, then uses it to build the operating ranges, and carries the worked March 2024 example of the April and October contracts above verbatim.

Expect a direct question on what the base price is on the first day of a contract — the answer is the theoretical futures price, not the spot rate and not the previous close of another contract — and a computation asking for the operating range given a base price and a tenure. Reading "6 months" correctly is the whole question.

Common exam traps

  • Day one is the exception. Base price equals the theoretical futures price only on the day of introduction. Every other day it is the previous daily settlement price.
  • Base price is not the spot rate, and not the opening price. It is a settlement price carried forward, which is why a contract can open away from it.
  • Currency futures have no daily price bands. The operating range is an erroneous-order check, not a circuit filter — and the workbook says so explicitly. Calling it a price band in a definitional question loses the mark.
  • ±3% and ±5% split at six months of tenure, not at six months from listing of the near month. The October contract in March gets 5%; the April contract gets 3%.
  • Options do not use this rule. Their range is delta-based, computed from the previous close of the underlying and volatility, subject to a minimum.
  • The band is relaxed in 1% increments on a market-wide trend — not doubled, and not removed.

Check yourself

  1. 1.How do the daily settlement price and final settlement price of a currency futures contract differ?

    1. a)They are computed identically, on different days
    2. b)DSP is the volume weighted average futures price of the last half hour of trading; FSP is the FBIL reference rate on the last trading day, derived from the spot market
    3. c)DSP comes from the spot market and FSP from the futures market
    4. d)Only the FSP is used for mark-to-market
    Show the answer

    Answer: (b) DSP is the volume weighted average futures price of the last half hour of trading; FSP is the FBIL reference rate on the last trading day, derived from the spot market

    Daily Settlement Price: it is required mainly for MTM settlement. The settlement price is the weighted average futures price (VWAP) of the trades generally in the last 30 minutes of trading (i.e. close price). If the close price is not available then the daily settlement price is set equal to the theoretical price of the futures contracts.

    The specification table puts it as: Volume Weighted Average Futures Price of last half an hour across exchanges or theoretical futures price.

    Final Settlement Price: all open positions on the last trading day of the currency futures contract are marked to the final settlement price for the relevant futures contract and settled on the final settlement day. The Final settlement price / rate is mainly derived from the underlying/spot market.

    For rupee pairs it is the FBIL reference rate on last trading day.

    Different markets, different purposes. DSP is a futures price used every day; FSP is a spot price used once, at the end.

    Option C reverses them. Option D is wrong because MTM is precisely the DSP's job: the positions in the futures contracts for each member are marked-to-market to the daily settlement price of the futures contracts at the end of each trade day, with the exchange collect[ing] these margins (MTM margins) from the loss-making participants and pay[ing] to the gainers on a day-to-day basis.

    The DSP has a second role too: it becomes the next day's base price, since the base price of the contracts on subsequent trading days is the daily settlement price of the futures contracts as computed by Clearing Corporation.

    The timelines: Daily Settlement: T+1. Final Settlement: T+2.

    For cross-currency contracts the FSP is built from two FBIL rates: using the FBIL reference rate for USD-INR and the corresponding exchange rate published by FBIL for EUR-INR, GBP-INR and JPY-INR, as applicable.

  2. 2.If the base price of a GBPINR one-month futures contract is Rs. 100, its operating range will be:

    1. a)97 and 103
    2. b)96 and 104
    3. c)95 and 105
    4. d)96 and 106
    Show the answer

    Answer: (a) 97 and 103

    Operating ranges are kept at +/-3% of the base price for contracts with tenure up to 6 months and +/- 5% of base price for contracts with tenure greater than 6 months.

    A one-month contract is under six months, so 3% applies.

    3% of 100 = 3, giving 97 and 103.

    Option C would be right only for a contract with tenure greater than six months.

    The chapter's own worked examples confirm the method: in March 2024, the USDINR contract expiring in April with a base price of Rs.83, will have an operating range of Rs. 80.51-85.49 (3% of 83 = 2.49) and the USDINR contract expiring in October with base price Rs. 84.50 will have an operating range of Rs. 80.275-88.725 (5% of 84.50 = 4.225).

    And these can widen: the dynamic price bands are relaxed in increments of 1% as and when a market-wide trend is observed.

    Note carefully what these ranges are. There are no daily price bands applicable for Currency Futures contracts. However, in order to prevent erroneous order entry by members, operating ranges are kept at...

    They are a fat-finger guard, not a circuit breaker — the contract has no daily price band at all.

    The same +/-3% and +/-5% rule applies to cross currency futures.

    For options the basis is entirely different: the price operating range is based on the delta of the options contract and calculated using the previous close price of the underlying and volatility. The price band so computed is subject to a minimum operating range... The bands are computed for each options contract on a daily basis and are applicable from the next trading day.

    And the base price itself moves daily — it is the theoretical price on day one and the daily settlement price thereafter.

Where this is taught

Free preparation for NISM Series IV

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