Beginning
Futures contracts are very important in the Indian financial markets because they help investors, traders, and businesses protect themselves from risk, make bets, and find better prices. These standardised derivative instruments have become very popular in the last few decades and are now an important part of the Indian capital market ecosystem, which is overseen by SEBI (Securities and Exchange Board of India).
This article is a full and detailed guide to futures contracts in India. It covers the trading process, the settlement process, and important parts of risk management.
What are contracts for the future?
A futures contract is a legally binding agreement between two people to buy or sell an asset at a set price on a set date in the future. Futures are different from forward contracts in that they are standardised and traded on regulated exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) in India.
Important Features of Futures Contracts
Standardisation means that the quantity, quality, and terms of settlement are all set ahead of time.
Exchange Traded: Traded on regulated exchanges that are open and liquid.
Marked to Market: Daily settling of gains and losses.
Leverage: Traders can put a lot of money on the line by only putting down a small amount as margin.
Futures contracts that are traded in India
Different Kinds of Futures Contracts
Equity Futures: Futures on stocks like Reliance, TCS, Infosys, and others.
Index Futures: These are based on broad market indices like the Nifty 50 and the Bank Nifty.
Commodity futures are traded on the MCX (Multi Commodity Exchange) and the NCDEX (National Commodity & Derivatives Exchange). They include metals, energy, and agricultural products.
Currency Futures are based on pairs of currencies, like USD-INR and EUR-INR.
Common Contracts
Nifty 50 Futures: A lot of people use them to hedge and bet.
Bank Nifty Futures: Shows how well the banking sector is doing.
Reliance Futures is one of the stock futures that is most liquid.
What is the process for trading futures in India?
How the Trading System Works Step by Step
How to Open a Trading Account
A trader needs to open a trading and demat account with a broker that is registered. NSE and BSE let you trade in futures.
Choosing the Contract
Pick a contract based on how long it lasts, what kind of asset it is, and how much risk you want to take.
Making Orders
Buy Order (Long Position): Expecting the price to go up.
Sell Order (Short Position): You think the price will go down.
Margins Needed
According to SEBI rules, traders must keep their initial and maintenance margins.
Mark-to-Market (MTM)
At the end of each trading day, positions are revalued, and the trader's account is settled with any gains or losses.
Expiration and Settlement: Contracts end every month, usually on the last Thursday of the month. Cash Settlement (common for index futures) is one way to settle.
Delivery in person (common in commodities and some stock futures).
The process of settling futures
1. Settlement Mark-to-Market Every Day
Every day of trading, positions are changed based on the closing price:
If the position makes money, the trader gets the money in their margin account.
The margin account is charged if the position is losing money.
2. Final Settlement at Expiration
Cash Settlement: When the contract ends, the cash difference between the contract price and the settlement price is paid.
Physical Delivery: The asset is delivered according to the terms of the contract.
This is an example of a cash settlement.
If a trader buys Nifty 50 futures at 17,000 and the index closes at 17,500 at the end of the contract, the trader makes a profit of 500 points times the lot size.
Managing Risk in Futures Trading
Futures trading has high leverage, which means that both profits and losses can be bigger. Managing risk well is very important.
1. System of Margins
Initial Margin: The amount you pay up front to open a position.
Maintenance Margin: The lowest amount of money needed to keep the position.
MTM Settlement: Daily adjustments keep the market safe from sudden defaults.
2. Orders to Stop Loss
Traders can set certain price levels at which the position will automatically close to avoid losing too much money.
3. Size of the Position
Managing how much money is put into each trade to avoid too much risk.
4. Hedging
Institutional investors and businesses often use futures to hedge against the risk of price changes in the underlying assets.
Hedging in Action
If a company thinks it will get $1 million in three months, it can sell USD-INR futures to protect itself from the value of the INR going down.
5. Safety measures put in place by the government
To keep the market honest, SEBI requires strict margin requirements, position limits, and reporting rules.
An Example of a Futures Trade in Real Life
Situation
A trader from India thinks that the Nifty index will go up in the next month.
The current Nifty spot price is 17,000.
Price of Nifty Futures Contract: 17,020 Lot Size: 75 Action
Sells 1 Nifty Futures lot for 17,020.
Nifty goes up to 17,500 after two weeks.
The trader makes the decision to sell the futures contract.
Finding the Profit
Gain per unit: 17,500 – 17,020 = 480 points.
Total profit is ₹36,000 (480 × 75), not counting transaction costs.
This shows how leveraged futures can be, since small changes in the underlying can cause big gains or losses.
Important rules in India
Oversight by SEBI
SEBI regulates all derivative activities to stop manipulation and systemic risk.
Limits on open positions: To keep the market from becoming too concentrated, there are limits on the number of open positions.
Cycles of Expiration
Most contracts end every month (this month, next month, and a long time from now).
Requirements for Reporting
For transparency, brokers must regularly report open positions and trades to exchanges.
Some Common Misunderstandings About Futures Trading
"Futures are only for experts"
Even retail traders can get involved, but they need to know what they're doing and how to manage risk.
"High Leverage Means High Profits"
Leverage makes both profits and losses bigger, so it's important to be careful with risk.
Final Thoughts
In India, futures contracts are a good way to find out what prices are going to be, protect yourself against risk, and make bets. Any trader or investor needs to know how they work, how they trade, and what risks they pose. A fair and liquid market is possible when margining systems, hedging techniques, and regulatory frameworks are used correctly.
If you're new to trading, it's best to start with index futures and learn as you go. If you're more experienced, you can trade individual stock futures, commodities, and currency futures. Disciplined risk management is still the most important thing for long-term success in the derivatives market.
