Unit of trading
Also written Unit of trading (IRF) · Trading unit
The quantity in one contract — for Indian bond and T-Bill futures, notional bonds of Rs 2 lakh face value, which is 2,000 units of Rs 100 — and the reason exposures round rather than match.
In plain language
An exchange decides everything about a futures contract except the price. The unit of trading is the size it fixes: one lot equals notional bonds of Rs 2,00,000 face value, that is 2,000 bonds of Rs 100 each.
That number governs more than order entry. It is why an exposure of Rs 3 lakh cannot be hedged exactly — the face value traded must be an integral multiple of Rs 2 lakh. It is why the tick value differs between contracts built on the same Rs 0.0025 tick size. And it is the bridge between the two ways a bond position is measured, because prices are quoted per Rs 100 of face value in both the cash and futures markets:
Market value = Face value × (Market price ÷ 100)
Against the wholesale debt market's cash lot of Rs 5 crore — equal to 250 futures contracts — the exchange lot is small, and deliberately so. The workbook makes the point that exchange-traded markets can serve hedging requirements too small for the OTC market to price at all.
How it works
Not every interest rate contract is sized in bonds.
| Contract | Unit of trading |
|---|---|
| Cash settled GOI bond futures (6Y, 10Y, 13Y) | 1 lot = notional bonds of Rs 2 lakh face value = 2,000 bonds |
| 91-day T-Bill futures | 1 contract = 2,000 units, face value Rs 2 lakh |
| Exchange traded interest rate options | 1 lot = notional bonds of Rs 2 lakh face value = 2,000 bonds |
| Overnight MIBOR futures | interest on a notional principal of Rs 5 crore for one month, on a 30/365 basis |
| Corporate bond index futures | contract value not less than Rs 2 lakh at introduction, reviewed half-yearly |
The MIBOR contract is the odd one out and the exam knows it: there is no bond and no face value, only an interest amount on a notional principal. Orders are entered in number of contracts and the quotation is an interest rate rather than a price.
The corporate bond index contract fixes a value floor rather than a quantity, and the exchanges review it half-yearly — a different mechanism again.
The formula
Bond futures / T-Bill futures / IRO
1 lot = Rs 2,00,000 face value = 2,000 units of Rs 100
Contract value = Trade price × 2,000
Market value = Face value × (Market price ÷ 100)
Overnight MIBOR futures
1 lot = interest on Rs 5 crore for one month, 30/365 basis
Value of 1 bp = Rs 5,00,00,000 × 0.01% × 30/365 = Rs 411
Lots needed to hedge a face value exposure = Face value ÷ Rs 2,00,000
A worked example
The rounding problem, which is the whole point of the entry. Three hedgers, three exposures:
| Exposure (face value) | Exact lots | Traded | Residual |
|---|---|---|---|
| Rs 5,00,00,000 | 250.00 | 250 lots | nil |
| Rs 5,30,00,000 | 265.00 | 265 lots | nil |
| Rs 5,37,00,000 | 268.50 | 268 or 269 | Rs 1,00,000 unhedged or Rs 1,00,000 over-hedged |
The first two hedge perfectly because the exposure happens to be a multiple of Rs 2 lakh. The third cannot, and no amount of care will fix it — the workbook lists exactly this standardisation as a cause of imperfect hedge.
The Chapter 5 short hedge, sized. An investor holds Rs 5 crore of 6.10% G-Secs 2031 and sells futures at Rs 99.95:
Lots = Rs 5,00,00,000 ÷ Rs 2,00,000 = 250 lots
At expiry the contract settles at Rs 98.36:
Profit = (99.95 − 98.36) × 250 lots × 2,000 units = Rs 7,95,000
The 2,000 in that line is the unit of trading doing its work.
Same tick size, three tick values. Every one of these contracts has a tick size of Rs 0.0025, and not one of them has the same tick value:
Bond futures : 2,000 × 0.0025 = Rs 5.00
T-Bill futures : 2,000 × 0.0025 × 0.25 = Rs 1.25
MIBOR futures : 0.25 bp × Rs 411 = Rs 102.75
The unit of trading, and what it is a unit of, explains the whole spread.
Why NISM asks about it
Chapter 3, section 3.3, states the unit of trading inside every contract specification, and section 3.4 (Lot Size, Tick Size and Change in Contract Value for each Tick change) works the arithmetic for cash settled GOI bond futures, 91-day T-Bill futures and Overnight MIBOR futures in turn — including the observation that face value must be an integral multiple of Rs 2 lakh, so Rs 3 lakh or Rs 5 lakh cannot be traded. Chapter 4, section 4.9, repeats it for interest rate options.
Questions ask for the number of lots needed to hedge a stated face value, for the contract value or tick value of a given contract, or simply for the lot size of a named contract — the Rs 2 lakh and 2,000 units being direct recall.
Common exam traps
- Rs 2 lakh is face value, not money paid. Contract value is
price × 2,000, which equals Rs 2 lakh only when the price is exactly 100. - Face value must be a whole multiple of Rs 2 lakh. Rs 3 lakh and Rs 5 lakh exposures simply cannot be traded, which is the workbook's own example.
- MIBOR futures are not sized in bonds. One contract is interest on Rs 5 crore for a month — no face value, no units of Rs 100.
- Do not carry a tick value across contracts. Rs 5, Rs 1.25 and Rs 102.75 all come from the same Rs 0.0025 tick size applied to different units.
- The cash market lot is Rs 5 crore, the futures lot Rs 2 lakh — 250 futures contracts to one WDM lot, and the exam has asked for that ratio.
- Corporate bond index futures fix a minimum contract value, not a lot size, and it is reviewed half-yearly rather than fixed.
Check yourself
1.What does one Overnight MIBOR futures contract represent, and what is the value of 1 basis point per contract?
- a)Notional bonds of face value Rs 2 lakh; Rs 5 per basis point
- b)Interest on a notional principal of Rs 1 crore for three months; Rs 250 per basis point
- c)Interest on a notional principal of Rs 5 crore for one year on an Actual/365 basis; Rs 5,000 per basis point
- d)Interest on a notional principal of Rs 5 crore for one month, calculated on a 30/365 day basis at the average daily FBIL overnight MIBOR for the contract month; Rs 411 per basis point
Show the answer
Answer: (d) Interest on a notional principal of Rs 5 crore for one month, calculated on a 30/365 day basis at the average daily FBIL overnight MIBOR for the contract month; Rs 411 per basis point
Unit of trading: "Interest on notional principal of Rs. 5 crores for one month calculated on 30/365 day basis at a rate equal to average daily FBIL overnight MIBOR for the contract month."
Value of 1 bp: "Rs. 411 = (Rs. 5 Crores * 0.01% * 30/365)". So contract value = Quoted Rate × 100 × 411, and one tick of 0.25 bp = Rs 102.75.
Why the others are wrong:
- (a) A Rs 2 lakh face value lot belongs to GOI bond futures and T-Bill futures. Rs 5 is the tick value of GOI bond futures, not a basis point value.
- (b) The principal and the period are both wrong.
- (c) The period is one month (30/365), not a full year. Rs 5,000 would be the full-year value of 1 bp on Rs 5 crore.
2.For an exchange traded interest rate option, which of the following correctly states the unit of trading and the contract value?
- a)1 lot = notional bonds of face value ₹2 crore; contract value = strike price × 2,000
- b)1 lot = 200 bonds; contract value = trade price × 200
- c)1 lot = notional bonds of face value ₹20 lakh; contract value = premium × 20,000
- d)1 lot = notional bonds of face value ₹2 lakh, i.e. 2,000 bonds; contract value = trade price × 2,000
Show the answer
Answer: (d) 1 lot = notional bonds of face value ₹2 lakh, i.e. 2,000 bonds; contract value = trade price × 2,000
The contract specification: "Unit of Trading — 1 Lot (1 lot = notional bonds of FV INR 2 Lakhs i.e. 2000 bonds)" and "Contract Value — Trade Price × 2000." The premium is quoted in Indian Rupees and the tick size is Rs 0.0025.
This is why the workbook turns a per-unit premium of ₹0.20 into a maximum loss per lot of Rs 400 (= 2000 × 0.20).
- (a) inflates the face value a hundredfold and uses the strike instead of the trade price.
- (b) and (c) use lot sizes that do not appear in the specification.
Where this is taught
Free preparation for NISM Series IVRelated terms
- Tick sizeThe smallest price change a contract may be quoted in — prices move only in whole multiples of it, and it differs from one commodity to another.
- Contract valuePrice or rate multiplied by the lot size or contract multiplier — the number margins, brokerage, transaction charges and regulatory fees are all computed from, and different for every contract.
- 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.
- Discount yieldThe return on a discount instrument expressed against its face value on a 30-day month and 360-day year — the convention the 91-day T-Bill futures contract is quoted and settled on.
- Imperfect hedgeA hedge that cannot fully offset an exposure because the contract is standardised — fixed lot sizes, a fixed expiry date and cash settlement leave a remainder the hedger keeps.
- 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.
- 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.
- Overnight MIBORThe benchmark overnight rupee interbank rate administered by FBIL, and the underlying of India's money market interest rate futures contract, which is quoted as a rate rather than a price.
- Notional principalThe reference amount interest is computed on in a swap, FRA or money market futures contract — it sizes the exposure and the settlement, but it is never exchanged.
- Tick valueThe rupee profit or loss on one contract when the price moves by a single tick — lot size divided by the quotation factor, multiplied by the tick size.
- Lot sizeThe minimum quantity that must be traded and, on a delivery contract, actually delivered at expiry — equal to or higher than both the trading unit and the minimum order quantity.
- Quotation factorThe physical unit a commodity is quoted in on the exchange — Rs per 10 grams for gold, Rs per kilogram for zinc — one of the three inputs that convert a one-tick price move into rupees.