A futures contract is an agreement made through an organized exchange to buy or sell a fixed amount of a commodity or a financial asset on a future date at an agreed price.
Simply, futures are standardized forward contracts that are traded on an exchange.
A trader, who buys futures contract, takes a long position and the one, who sells futures, takes a short position.
Features of futures contract
Futures Contract Terminology
Spot Price:- The price at which an asset trades in the cash market
Future Price:- The price of the futures contract in the futures market.
Contract Cycle:- It is a period over which a contract trades. The maximum number of index futures contracts is of 3 months contract cycle – Near , Next & Far Month.
Expiration Day:– The day on which a derivative contract ceases to exist. It is last trading day of the contract. Generally, it is the last Thursday of the expiry month.
Tick Size:- It is minimum move allowed in the price quotations. Exchanges decide the tick sizes on traded contracts as part of contract specification. Tick size for Nifty futures is 5 paisa.
Contact Size/Value:- Futures contracts are traded in lots and to arrive at the contract value we have to multiply the price with contract multiplier or lot size or contract size.
Basis:- The difference between the spot price and the futures price is called basis.
Open Interest:– An open interest is the total number of contracts outstanding (yet to be settled)for an underlying asset.
Cost of Carry:- It is the relationship between futures prices and spot prices. It measures the storage cost (in commodity markets) plus the interest that is paid to finance or ‘carry’ the asset till delivery less the income earned on the asset during the holding period. For equity derivatives, carrying cost is the interest paid to finance the purchase less (minus) dividend earned.
Initial Margin:- The amount one needs to deposit in the margin account at the time of entering a futures contract is known as the initial margin.
Marking to Market (MTM):- In futures market, while contracts have maturity of several months, profits andlosses are settled on day‐to‐day basis called mark to market (MTM)settlement
