Understanding Futures Calendar

5.1 Understanding Futures Calendar Spreads in USD-INR

Varun: I was reading about arbitrage in futures contracts. You know, the whole idea that futures should trade at a premium to spot because of the cost of carry. But I got stuck when it came to currency futures, especially USD-INR. How do traders capture spreads there?

Isha: Ah, great question. In theory, yes , futures should trade above spot due to interest rates. If they don’t, there’s an arbitrage opportunity. But in USD-INR, retail traders can’t access the spot market directly, so traditional spot-futures arbitrage isn’t practical.

Varun: So then how do you trade mispricing in currencies?

Isha: You look at the spread between two futures contracts with different expiry dates. That’s called a calendar spread.

Varun: Like October vs November contracts

Isha: Exactly. Normally, the longer-dated contract say November, should trade at a premium to October. That’s the “normal” spread, reflecting time value and interest rate differentials. But if the spread widens or narrows beyond what’s typical, it signals a potential trading opportunity. You can capture that by entering a calendar spread, like buying October and selling November, if you expect the spread to compress.

Varun: Got it. So what’s the setup?

Isha: Let’s say:

• October Futures= ₹88.4000
• November Futures= ₹88.7290
• Spread= ₹0.3290

Now, if you believe the fair spread should be around ₹0.2000, then the current spread looks too wide. You can capture this mispricing by:

• Buying October Futures at ₹88.4000
• Selling November Futures at ₹88.7290

This is called a Futures Bull Spread—because you’re long the near-month and short the far-month contract.

You make money if:

• October Futures rise and November Futures fall
• October Futures rise and November stay flat
• Both rise, but October rises faster than November
• November falls more than October
• October stays flat and November falls

In each case, the spread between the two contracts narrows toward your target of ₹0.2000, and that’s where your profit comes from. You’re essentially betting that the near-month contract (October) will outperform the far-month contract (November) in relative terms.

Varun: What if I think the spread is too narrow and will widen?

Isha: Then you flip the trade, sell October and buy November. That’s a Futures Bear Spread.

Varun: Interesting. But how do I know what’s “normal”?

Isha: That’s where back-testing comes in. You study historical spreads, volatility, and seasonality. It’s a bit of work, but it helps you spot patterns and build conviction.

Varun: Makes sense. And I can place these trades directly from my terminal?

Isha: Yup. Most platforms let you execute calendar spreads with a few clicks. It’s a clean way to trade relative value without needing spot access.

In theory, a futures contract should always trade at a premium to its spot price. This premium reflects the cost of carry, essentially the interest rate component embedded in the futures pricing formula. When this relationship breaks down, it opens the door to arbitrage opportunities.

Spot vs Futures Arbitrage

Let’s say:

• Spot Price= ₹100
• Fair Value of Futures= ₹105
• Actual Futures Price= ₹98

Here, the futures are trading below their fair value. The spread between fair value and actual futures price is:

 This mispricing allows a trader to buy the futures at ₹98 and sell the spot at ₹100, capturing the spread when both prices converge at expiry.

Why This Doesn’t Work in USD-INR

Unlike equities, retail traders don’t have direct access to the USD-INR spot market. So traditional spot-futures arbitrage isn’t feasible. But there’s a workaround: Calendar Spreads.

What Is a Calendar Spread?

A calendar spread involves trading two futures contracts with different expiry dates. Instead of comparing spot and futures, you compare near-month vs far-month futures.

Typically, the longer-dated contract trades at a premium to the shorter one. This difference is considered normal. But when the spread deviates significantly, either widening or narrowing, it may signal a trading opportunity.

What About a Bear Spread?

If the spread is too narrow and you expect it to widen, you’d do the opposite:

• Sell October Futures
• Buy NovemberFutures

This is called a Futures Bear Spread.

Will the Spread Converge?

That depends on market dynamics, interest rate expectations, and macro flows. To trade spreads effectively, you need to study historical behavior, this is where backtesting comes in.

5.2 Executing the Spread

Varun: Isha, I noticed the price difference between the October and November USD-INR contracts is widening. Is there a way to trade that directly?

Isha: Absolutely. That’s called a calendar spread, and you can capture it using a spread instrument instead of placing two separate orders.

Varun: That sounds efficient. I’ve always worried about execution risk when managing both legs manually.

Isha: Exactly why spread instruments exist. Let me walk you through how to set one up and trade it cleanly.

Let’s say you’ve identified a trading opportunity in the USD-INR futures market. The spread between the October and November contracts looks overpriced, and you want to capture it.

Instead of manually placing two separate orders, buying one contract and selling the other, you can trade the spread directly using a spread instrument. This reduces execution risk, where price movements between the two legs could erode your expected profit.

Step-by-Step Setup

1. Select the Spread Instrument:

• Choose “Spread” from the drop-down to indicate you’re trading a spread.
• Select the currency derivatives segment.
• Choose futures contracts (FUTCUR).
• Pick USD-INR as the currency pair.
• From the available spreads, select the October–November spread.

2. View the Spread Price:

• Suppose the October contract is trading at ₹87.21 and the November contract at ₹87.60.
• The spread = 87.60 – 87.21 = ₹0.39

Understanding Bid-Ask Spread Dynamics

Let’s break down the two possible spread setups:

Bull Spread (Buy October, Sell November):

• Buy October at Ask = ₹87.23
• Sell November at Bid = ₹87.58
• Spread = ₹87.58 – ₹87.23 = ₹0.35

Bear Spread (Buy November, Sell October):

• Buy November at Ask = ₹87.62
• Sell October at Bid = ₹87.20
• Spread = ₹87.62 – ₹87.20 = ₹0.42

The spread instrument may reflect an average of these two values. In this case, the midpoint is ₹0.385, and the actual market spread might show ₹0.39, which is close. Minor discrepancies can arise due to quote delays or low liquidity.

Placing the Order

Once the spread instrument is loaded:

• Select it from your market watch.
• Use the buy or sell shortcut keys to open the order window.
• The form will be pre-filled with spread details.
• Adjust the quantity to match your lot size and submit the order.

This method simplifies execution and helps you focus on capturing the spread rather than juggling two contracts.

5.3 USD-INR Statistical Overview: 2016–2024

Varun: I’ve been trading USD-INR for a while now, but I’ve never really looked at its long-term behavior. Is there any value in studying the stats?

Isha: Absolutely. Understanding how USD-INR has moved over the years—its trends, volatility, and correlation with equities—can sharpen your strategy.

Varun: I usually focus on charts and setups, but I guess the macro view adds depth.

Isha: It does. Let’s walk through the statistical overview from 2016 to 2024. You’ll see how the Rupee has evolved and what it means for traders like us.

1. Long-Term Trend Analysis

• Over the past eight years, the Indian Rupee has continued to depreciate against the US Dollar. From July 2016 to October 2025, the USD-INR spot rate has moved from approximately ₹67 to nearly ₹88. This depreciation reflects a combination of global monetary tightening, persistent current account deficits, and intermittent capital outflows.
• For instance, during 2022–2023, the Federal Reserve’s aggressive rate hikes triggered a flight to safety, strengthening the Dollar globally. Simultaneously, India faced elevated import bills due to high crude prices, further pressuring the Rupee. In 2024, despite RBI’s active intervention, the Rupee touched record lows amid geopolitical tensions and FII outflows.

2. Daily Return Characteristics

Recent data from September–October 2025 shows the following daily return behavior for USD-INR:

• The average daily return remains modest, around 0.02%–0.03%, with occasional spikes due to macroeconomic events. Compared to equity indices like Nifty 50, the USD-INR pair exhibits lower volatility, making it a relatively stable asset for hedging and conservative trading.

3. Volatility Comparison: USD-INR vs Nifty 50

• As of October 2025, the 1-month historical volatility for Nifty 50 stands at 7.99%, while USD-INR’s 1-month volatility is significantly lower, around 3.2% based on RBI spot data.
• This disparity highlights the relative calmness of currency markets compared to equities. For example, during the recent Q3 earnings season, Nifty 50 saw intraday swings exceeding 2%, whereas USD-INR moved within a 0.5% band despite global Dollar weakness.

4. Correlation with Nifty 50

• The inter-market relationship between USD-INR and Nifty 50 continues to show a weak inverse correlation. When equity markets rally, foreign inflows strengthen the Rupee, leading to a decline in USD-INR. Conversely, during equity sell-offs, USD demand rises, weakening the Rupee.
• Recent analysis confirms this with a correlation coefficient of approximately -0.14 for 2025 YTD.
• For instance, in September 2025, as Nifty 50 rebounded post-policy announcements, USD-INR declined from ₹88.9 to ₹87.3, reflecting capital inflows and improved sentiment.

5. Practical Implications for Traders

   • Volatility-Based Strategy:Currency traders may prefer USD-INR options for hedging due to lower implied volatility compared to Nifty options.
   • Calendar Spreads:Traders can deploy calendar spreads in USD-INR futures by buying near-month and selling far-month contracts to benefit from time decay and roll yield.
   • Macro Hedging:Portfolio managers tracking Nifty 50 can use USD-INR as a macro hedge during periods of expected FII outflows or geopolitical uncertainty.

5.4 Key Takeaways

1. Traditional spot-futures arbitrage is impractical for retail traders in USD-INR due to lack of spot market access.
2. Calendar spreads offer a practical way to trade mispricing between near-month and far-month USD-INR futures.
3. A bull spread involves buying the near-month contract and selling the far-month, profiting if the spread narrows.
4. A bear spread involves selling the near-month and buying the far-month, profiting if the spread widens.
5. Spread instruments simplify execution by allowing traders to place both legs of the spread in a single order.
6. Execution risk is reduced when using spread instruments, as price slippage between legs is minimized.
7. Traders must analyze bid-ask dynamics to understand the actual spread and potential profitability.
8. Historical spread behavior, seasonality, and volatility are key inputs for backtesting and strategy development.
9. The USD-INR pair shows relatively low volatility compared to equity indices, making it suitable for conservative strategies.
10. USD-INR futures and options can be used for macro hedging, volatility-based trades, and calendar spread setups.

5.5 Fun Activity

You are a currency trader analyzing the USD-INR futures market. Your goal is to identify whether a bull spread or bear spread is appropriate based on the current market data and expected fair spread.

Scenario:

You observe the following prices on your trading terminal:

• October USD-INR Futures: ₹88.4000
• November USD-INR Futures: ₹88.7290
• Historical average spread between near and far month: ₹0.2000

Questions:

1. What is the current spread between October and November contracts?
2. Is the current spread wider or narrower than the historical average?
3. Based on this, would you initiate a bull spread or a bear spread?
4. If the spread moves to ₹0.2200, what is your profit or loss per lot?
5. What are two possible market scenarios where your spread trade would be profitable?

Answer Key:

• Spread = ₹88.7290 − ₹88.4000 = ₹0.3290
• The spread is wider than the historical average of ₹0.2000
• You would initiate a bull spread: Buy October, Sell November
• Change in spread = ₹0.3290 − ₹0.2200 = ₹0.1090 Profit per lot = ₹0.1090 × 1,000 = ₹109
• Possible profitable scenarios:

• October futures rise faster than November futures
• November futures fall while October remains flat or rises