Futures contract
Also written Futures · Future · Equity futures · Index futures · Stock futures
A standardised forward traded on an exchange, where the exchange fixes every term except the price and the clearing corporation guarantees settlement, so neither side carries the other's default risk.
In plain language
A futures contract is a forward with its two defects engineered out.
Take the private agreement, make every term identical for everybody — same underlying, same lot size, same expiry dates, same tick size — and list it on an exchange. Now the contract you hold is interchangeable with the one everybody else holds, so there is a market in it and you can get out whenever you like by trading the opposite way. That fixes illiquidity.
Then put a clearing corporation between the two sides, so that in law your counterparty is the clearing corporation rather than the stranger who took the other side. Collect margin from both of them and settle the profit and loss every single day. That fixes counterparty risk.
What is left is the same economic bargain as a forward: buy or sell a fixed quantity on a fixed future date at a price fixed today.
How it works
The exchange decides everything except the price. Price is the one term discovered by the free interaction of buyers and sellers on the trading platform; the rest arrives as contract specifications.
The workbook lists the features as: a contract between two parties through the exchange; a centralised trading platform; price discovery through free interaction of buyers and sellers; margins payable by both parties; quality decided today; quantity decided today.
A buyer of futures takes a long position, a seller takes a short position. The words are figurative — no money and no underlying asset changes hands between them when the deal is originated; only margin is placed with the exchange.
The standardisation that solves the forward's problems creates the futures contract's own limitations, which the workbook states plainly: limited maturities, a limited set of underlyings, no flexibility in contract design, and higher administrative cost because of daily mark-to-market settlement. A company that needs 7,340 kg delivered on 19 November cannot get it from a futures market.
The formula
Contract value = Futures price × Lot size (contract multiplier)
A worked example
From the NSE quote for Nifty futures on 3 October 2025 that the workbook reproduces:
| Specification | Value |
|---|---|
| Instrument type | Index futures |
| Underlying asset | Nifty 50 |
| Expiry date | 28 October 2025 |
| Open | 24,950.40 |
| High | 25,020.00 |
| Low | 24,878.60 |
| Closing futures price | 25,006.60 |
| Underlying (spot) value | 24,894.25 |
Taking the workbook's assumed lot size of 65:
Contract value = 25,006.60 × 65 = Rs 16,25,429
That single number is the whole lesson. A trader who buys one lot has taken on an exposure of over Rs 16 lakh while depositing only the initial margin — a fraction of it.
Three more specifications follow from the same quote. The tick size for Nifty futures is 5 paise, so the price can only move in steps of 0.05. Trading hours are 9.15 am to 3.30 pm, Monday to Friday. The final settlement price is the closing value of the Nifty in the cash segment on 28 October 2025 — the last Tuesday of the expiry month — not the futures price on that day.
The BSE Sensex futures contract is specified differently again, with a contract size of 20. Contract size is a decision of the exchange, revised as index levels and stock prices change, never something you should assume.
Why NISM asks about it
Chapter 3, sections 3.2 and 3.3, are the core of the paper. Section 3.2 lists the features and limitations; 3.3 walks through the contract specifications of a Nifty futures contract line by line. Expect direct computation of contract value from futures price and lot size, questions on which term the exchange does not decide (the price), and the forwards-versus-futures comparison in every form. The distinction between the daily settlement price and the final settlement price is examined separately and is a reliable source of marks.
Common exam traps
- The exchange fixes every term except price. Candidates reverse this. Price is discovered; quantity, quality, expiry and tick size are imposed.
- Contract value is computed on the futures price, not the spot price. In the quote above those are 25,006.60 and 24,894.25 — different numbers, and only one of them is right.
- Both buyer and seller pay initial margin. Both have an obligation, so both are a risk to the system. This is the sharpest contrast with options, where only the seller posts margin.
- The final settlement price is a cash-market number. It is the closing price of the underlying index or stock on the last trading day, not the last traded futures price.
- Standardisation is a limitation as well as a virtue. If a question asks for a limitation of futures, "lack of flexibility in contract design" and "limited maturities" are the answers — not counterparty risk, which futures removed.
- Long and short describe direction, not order of events. A trader can short a futures contract he has never owned; nothing is borrowed.
Where this is taught
- Series X-A · Chapter 10: Understanding Derivativesintroduced here
- Series SEBI-ICE · Chapter 5: Investment in Securities Marketintroduced here
- Series XXI-A · Chapter 5: Derivativesintroduced here
- Series VIII · Chapter 1: Basics of Derivativesintroduced here
- Series IV · Chapter 2: Interest Rate Derivativesintroduced here
- Series XVI · Chapter 1: Introduction to Commodity Marketsintroduced here
- Series XXI-B · Chapter 5: Derivativesintroduced here
- Series X-B · Chapter 11: Taxation of Equity Productsintroduced here
- Series V-D · Chapter 15: Introduction to Forwards and Futuresintroduced here
- Series IV · Chapter 3: Exchange Traded Interest Rate Futures
- Series V-D · Chapter 20: Exchange Traded Interest Rate Futures
- Series XVI · Chapter 3: Commodity Futures
- Series VIII · Chapter 3: Introduction to Forwards and Futures
Related terms
- Clearing corporationThe entity that steps between every buyer and seller in the derivatives segment by novation, becoming the counterparty to both sides and guaranteeing that the trade settles.
- Daily Settlement PriceThe price at which every open futures position is marked and reset at the end of each day — the last 30 minutes' volume weighted average price of that contract, computed separately for each expiry.
- Forward contractA bilateral, over-the-counter agreement between two parties to buy or sell an asset on a fixed future date at a price agreed today — customised to suit them, and binding on both.
- LeverageControl of a large contract value for a small upfront outlay — premium for an option buyer, margin for a futures position — which multiplies percentage gains and percentage losses by the same factor.
- Contract specificationsThe terms of an exchange-traded derivative that the exchange fixes in advance — underlying, lot size, contract cycle, expiry day, tick size, settlement prices, trading hours — everything except the price.
- Initial marginThe deposit both the buyer and the seller of a futures contract must place before the position is accepted, sized to cover a 99% worst-case one-day loss on that position.
- Interest Rate FuturesA standardised exchange-traded contract to buy or sell a notional government security, or an interest rate itself, at a price agreed today for settlement on a future date.
- Corporate Bond Index FuturesCash-settled futures on an index of corporate debt rated AA+ and above, permitted by SEBI in January 2023 to give the corporate bond market a hedge of its own.
- Conversion factorThe multiplier that scales a futures settlement price into a fair invoice price for each bond in the deliverable basket, by valuing that bond at the notional 7% yield.
- Notional bondA theoretical bond with a fixed coupon and maturity that no one has issued — used as a futures underlying so the contract does not depend on the liquidity of any single security.
- Interest rate swapAn agreement to exchange streams of interest payments on a notional principal for a set period — typically fixed against floating — where only the net difference ever changes hands.
- OTC derivativeA non-standard derivative contract settled directly between counterparties on mutually agreed terms, relying on trust between them rather than on an exchange and clearing house.
- Law of one priceThe principle that identical assets cannot trade at different prices in two markets, beyond the transaction costs between them — because arbitrageurs would close the gap.
- Asymmetric risk exposureThe defining pay-off feature of options: gains when the underlying moves one way differ sharply from losses when it moves the other way. Futures, by contrast, have symmetric exposure.
- Expectancy modelThe view that a futures price is simply the market's expected spot price at expiry, so futures can trade at a premium or discount to spot and signal the expected direction of prices.
- Fair valueThe theoretical futures price — spot plus the cost of carrying the commodity to expiry — at which a buyer is indifferent between buying today and buying forward.
- Pay-offThe profit or loss on a position at expiry, stated as a function of the settlement price — positive when the trade makes money, negative when it loses.
- DerivativeA contract whose value is derived from the value of something else — the underlying — rather than from anything the contract itself owns or produces.
- Mark to MarketThe daily settlement of a futures position at that day's closing price, so gains and losses are paid in cash every evening instead of accumulating until expiry.
- Open interestThe total number of derivative contracts outstanding and not yet settled in an underlying — counted on one side only, because every long is matched by a short.
- Price discoveryThe process by which the free interaction of buyers and sellers produces a price that reflects every participant's expectation of what the underlying will be worth at a future date.
- UnderlyingThe asset a derivative contract derives its value from — the index, stock, bond or currency whose spot price drives the contract. The derivative has no value of its own without it.
- Exchange traded derivativeA derivative traded on an organised exchange on standardised terms, with prices set by anonymous auction and performance guaranteed by a clearing corporation — as against a bilateral, customised OTC contract.
- ConvergenceThe certainty that a futures price and the spot price of its underlying meet at expiry — because on the last trading day the contract settles at the cash market price, leaving no room for a difference.
- RolloverCarrying a derivatives position past expiry by closing the expiring contract and opening the same position in the next series simultaneously — the only way to hold a view longer than one contract cycle.
- Fixed-for-floating swapA commodity swap in which one side pays a fixed price agreed at the outset and the other pays a floating price — a spot price, a nearest-futures price, or an average of either — reset each period.
- Osaka Rice ExchangeThe first known organised futures market, set up in Japan in 1730, where rice bills issued against stored rice turned from title certificates into a right to future delivery at the current price.
- HedgingTaking a derivative position that moves opposite to an exposure you already have, so gains on one offset losses on the other and the future rate is locked in at a known level.
- Base priceThe 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.
- Currency futuresA standardised exchange-traded contract to buy or sell one currency against another on a future date at a price fixed today; in India, cash-settled in rupees, USD 1,000 a lot for USDINR.
- Cash settlementSettling a derivative on expiry or exercise by exchanging the price difference, without delivering the underlying asset. SEBI mandates physical settlement for stock derivatives, not index derivatives.
- Value at RiskA statistical estimate of the most a position is likely to lose over a set holding period at a chosen confidence level — the idea behind the initial margin a clearing corporation charges on a derivatives trade.
- Securities Transaction TaxA central government tax collected by the exchange on the sell side of every futures and option trade — 0.05% of futures traded value, 0.15% of option premium, and 0.15% of settlement price on exercise.
- Counterparty riskThe risk of an economic loss because the other party to a contract fails to fulfil its obligation — acute in forwards, and removed for exchange-traded derivatives by the clearing corporation's guarantee.
- Cost of carryThe cost of holding an asset until a future date — financing interest plus storage, less any income it pays. It links spot to futures: fair futures price = spot + cost of carry − inflows.
- Long hedgeA hedge made by buying futures to protect against a price rise before a planned future purchase — the gain on futures offsets the higher cash price, locking in roughly the futures price.
- Short hedgeA hedge made by selling futures to protect an existing holding or a planned sale against a price fall — the futures gain offsets the lower cash price, locking in roughly the futures price.
- Contract cycleThe period over which a derivative contract trades, and the set of expiries available at once — for NSE stock and index futures, a three-month cycle of near, next and far months.
- Long positionAn outstanding, unsettled buy position in a derivatives contract — the buyer of a futures contract, or the buyer (holder) of an option, is said to be long.
- Index derivativesDerivative contracts — chiefly index futures and index options — that have a stock index as the underlying asset. In India they are cash settled and used to hedge market risk.
- Asymmetric payoffA payoff where gains when the underlying moves one way differ sharply from losses when it moves the other — the defining feature of options, as against the symmetric, linear payoff of futures.
- Calendar spreadA long position in futures of one maturity and a short position in futures of another maturity on the same underlying. It is a bet on the price gap between the two months, not on market direction.
- Unsuitable recommendationAdvising or selling an investment that does not fit the investor's objectives and risk profile — the workbook's example is a broker putting a low-risk-tolerance senior citizen into futures or penny stocks.
- Strike priceThe price fixed in an option contract at which the buyer may buy (call) or sell (put) the underlying if he chooses to exercise — fixed for the life of the contract, unlike the premium.
- European optionAn option that can be exercised only on its expiry date. Indian equity options are European — coded CE for calls and PE for puts — unlike American options, exercisable any time up to expiry.
- SwapA derivative in which two parties agree to a specified exchange on future dates — typically one pays a fixed interest rate and receives a floating one on an agreed principal that never itself changes hands.
- Zero sum gameThe principle that every derivative long has a matching short, so one side's gain is exactly the other side's loss and the net value of all derivative positions is zero.