A futures contract is a legally binding agreement between two parties to buy or sell an underlying asset at a predetermined price on a specific future date. Unlike a forward contract, futures are standardised and traded on a recognised stock exchange (e.g., NSE), which eliminates counterparty risk through daily mark-to-market (MTM) settlement via a clearing corporation (NSCCL).

Key Features

  • Standardisation: Lot size, expiry date, tick size, and settlement method are fixed by the exchange.
  • Margin: Both buyer and seller deposit an initial margin (typically 5–15% of contract value). Daily MTM losses are debited and gains credited to margin accounts.
  • No upfront premium: Unlike options, no premium is paid to enter a futures contract.
  • Settlement: Most equity futures in India are cash-settled on the last Thursday of the expiry month.

Pricing

Futures price is determined by the cost of carry model:

F = S × e^(r+d-q)×T or simplified: F = S × (1 + r - d) × T

Where S = spot price, r = risk-free rate, d = dividend yield, T = time to expiry.