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.
Check yourself
1.Which statement about the payoff of a futures contract is CORRECT?
- a)The long position has unlimited profit potential but limited loss
- b)The short position has unlimited profit potential but limited loss
- c)Both long and short positions have unlimited profit or loss potential, giving linear payoffs
- d)Both positions have limited profit and limited loss
Show the answer
Answer: (c) Both long and short positions have unlimited profit or loss potential, giving linear payoffs
The workbook states that in futures contracts, long as well as short positions have unlimited profit or loss potential, and that this results in linear payoffs.
A long at 100 gains ₹50 if the price reaches 150 and loses ₹30 if it falls to 70 — the payoff runs straight through zero at the contract price, in both directions. The short is the exact mirror image.
Options A and B describe an option payoff, not a futures payoff. This limited-versus-unlimited contrast is one of the most frequently tested distinctions between Chapter 3 and Chapter 4.
2.On 3 October 2025 the Nifty spot was 24,894.25 and the October Nifty futures closed at 25,006.60. The basis for this futures contract is:
- a)Positive, at +112.35
- b)Negative, at −112.35
- c)Zero, because the contract has not yet expired
- d)Undefined, because spot and futures are different instruments
Show the answer
Answer: (b) Negative, at −112.35
Basis = spot price − futures price = 24,894.25 − 25,006.60 = −112.35.
The sign convention catches people out. If the futures price is greater than the spot price, the basis is negative. A futures premium feels like it should be "positive", and that instinct is exactly what option A punishes.
Option C confuses two facts. Basis moves during the life of the contract and can be positive or negative; it becomes zero at maturity, not before, because final settlement takes place at the closing price of the underlying.
3.Which statement about a futures contract is CORRECT?
- a)It is negotiated directly between two parties and its terms are customised
- b)It is similar to a forward except that the deal is made through an organised and regulated exchange, and it is standardised
- c)It gives the buyer a right but not an obligation to transact
- d)It involves the exchange of a series of cash flows according to a prearranged formula
Show the answer
Answer: (b) It is similar to a forward except that the deal is made through an organised and regulated exchange, and it is standardised
The workbook is compact on this: a futures contract is similar to a forward, except that the deal is made through an organized and regulated exchange rather than being negotiated directly between two parties. Futures are also standardised — in terms of lot size, maturity date and so on — so that they can be traded on the exchange. Its own one-line summary: futures are exchange traded forward contracts.
Option A describes a forward — negotiated between two parties, terms customised, an OTC contract.
Option C describes an option, the only one of the four products where one side has a right without an obligation.
Option D describes a swap, an agreement to exchange cash flows in the future according to a prearranged formula — broadly, a series of forward contracts.
The test that always works: if the question mentions an exchange or a clearing corporation, it is a future; if it mentions direct negotiation between two parties, it is a forward.
Where this is taught
- Series X-B · Chapter 11: Taxation of Equity Productsintroduced here
- Series SEBI-ICE · Chapter 5: Investment in Securities Marketintroduced here
- Series IV · Chapter 2: Interest Rate Derivativesintroduced here
- Series V-D · Chapter 15: Introduction to Forwards and Futuresintroduced here
- Series VIII · Chapter 1: Basics of Derivativesintroduced here
- Series XVI · Chapter 1: Introduction to Commodity Marketsintroduced here
- Series X-A · Chapter 10: Understanding Derivativesintroduced 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 specificationsAll the terms of a futures contract fixed by the exchange other than the price — maturity, contract size, tick size and so on.
- 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.
- DerivativeA contract whose value is derived from the value of something else — the underlying — rather than from anything the contract itself owns or produces.
- 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.
- 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.
- 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.
- 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.
- 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.