{"id":21130,"date":"2022-03-08T14:25:22","date_gmt":"2022-03-08T14:25:22","guid":{"rendered":"https:\/\/www.5paisa.com\/finschool\/?post_type=markets&#038;p=21130"},"modified":"2023-01-24T01:07:24","modified_gmt":"2023-01-23T19:37:24","slug":"futures-contract","status":"publish","type":"markets","link":"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/futures-contract\/","title":{"rendered":"Explore The Futures Contract in Detail"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"21130\" class=\"elementor elementor-21130\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-23ba90b elementor-section-full_width tab_container elementor-section-height-default elementor-section-height-default\" data-id=\"23ba90b\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-b6a6f9f\" data-id=\"b6a6f9f\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-e0f864e elementor-section-full_width elementor-section-height-default elementor-section-height-default\" data-id=\"e0f864e\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-wide\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-7efb245 chapters_list\" data-id=\"7efb245\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-33d4575 elementor-widget elementor-widget-shortcode\" data-id=\"33d4575\" data-element_type=\"widget\" data-widget_type=\"shortcode.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-shortcode\">\t<script>\n\t\tjQuery(document).ready(function(){\n\t\t\tjQuery(\"#post_chapters a[href*='\" + location.pathname + \"']\").addClass(\"current\");\n\t\t})\n\t<\/script>\n\t<div class=\"desktop_chapters\"><div id=\"post_chapters\"><div class=\"post_chapters-heading\">Chapters<\/div><ul><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/introduction-to-derivatives\/\">Introduction To Derivatives<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/derivatives-market\/\">Derivatives Market<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/forwards-contract\/\">Forwards Contract<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/futures-contract\/\">Futures Contract<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/trading-strategies-in-stock-futures\/\">Trading Strategies In Stock Futures<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/pricing-of-futures-contract\/\">Pricing of Futures Contract<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/options\/\">Options<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/swaps\/\">Swaps<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/understanding-margins\/\">Understanding Margins<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/open-interest\/\">Open Interest<\/a><\/li><\/ul><\/div><\/div><div class=\"chapters_toggle\" title=\"chapters\"><a title=\"chapters\" href=\"#\" id=\"open_chapters\"><span>View Chapters<\/span>&nbsp;&nbsp;&nbsp;<i class=\"fa fa-chevron-right\"><\/i><\/a><a title=\"chapters\" href=\"#\" id=\"close_chapters\" style=\"display:none;\"><span>Hide Chapters<\/span>&nbsp;&nbsp;&nbsp;<i class=\"fa fa-chevron-right\"><\/i><\/a><\/div>\t<script>\n\t\tjQuery(document).ready(function(){\n\t\t\tjQuery('.chapters_toggle #open_chapters').click(function(e){\n\t\t\t\te.preventDefault();\n\t\t\t\tjQuery('.desktop_chapters').css(\"left\",\"0px\");\n\t\t\t\tjQuery('#open_chapters').css(\"display\",\"none\");\n\t\t\t\tjQuery('#close_chapters').css(\"display\",\"block\");\n\t\t\t\t\/\/jQuery('.chapters_toggle').css(\"width\",\"200px\");\n\t\t\t})\n\t\t\tjQuery('.chapters_toggle #close_chapters').click(function(e){\n\t\t\t\te.preventDefault();\n\t\t\t\tjQuery('.desktop_chapters').css(\"left\",\"-480px\");\n\t\t\t\tjQuery('#open_chapters').css(\"display\",\"block\");\n\t\t\t\tjQuery('#close_chapters').css(\"display\",\"none\");\n\t\t\t\t\/\/jQuery('.chapters_toggle').css(\"width\",\"100%\");\n\t\t\t})\n\t\t});\n\t<\/script>\n\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-93f371b tabs_contents\" data-id=\"93f371b\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-90f6d06 market_content_tabs elementor-widget elementor-widget-eael-adv-tabs\" data-id=\"90f6d06\" data-element_type=\"widget\" data-widget_type=\"eael-adv-tabs.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t        <div data-scroll-on-click=\"no\" data-scroll-speed=\"300\" id=\"eael-advance-tabs-90f6d06\" class=\"eael-advance-tabs eael-tabs-horizontal eael-tab-auto-active \" data-tabid=\"90f6d06\">\n            <div class=\"eael-tabs-nav \">\n                <ul class=\"eael-tab-inline-icon\" role=\"tablist\">\n                                            <li id=\"study\" class=\"active-default eael-tab-item-trigger eael-tab-nav-item\" aria-selected=\"true\" data-tab=\"1\" role=\"tab\" tabindex=\"0\" aria-controls=\"study-tab\" aria-expanded=\"false\">\n                            \n                                                                <i class=\"far fa-edit\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Study<\/span>                            \n                                                    <\/li>\n                                            <li id=\"slides\" class=\" eael-tab-item-trigger eael-tab-nav-item\" aria-selected=\"false\" data-tab=\"2\" role=\"tab\" tabindex=\"-1\" aria-controls=\"slides-tab\" aria-expanded=\"false\">\n                            \n                                                                <i class=\"fas fa-book-open\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Slides<\/span>                            \n                                                    <\/li>\n                                            <li id=\"videos\" class=\" eael-tab-item-trigger eael-tab-nav-item\" aria-selected=\"false\" data-tab=\"3\" role=\"tab\" tabindex=\"-1\" aria-controls=\"videos-tab\" aria-expanded=\"false\">\n                            \n                                                                <i class=\"far fa-eye\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Videos<\/span>                            \n                                                    <\/li>\n                    \n                                  <\/ul>\n            <\/div>\n            \n            <div class=\"eael-tabs-content\">\n\t\t        \n                    <div id=\"study-tab\" class=\"clearfix eael-tab-content-item active-default\" data-title-link=\"study-tab\">\n\t\t\t\t        <p><div class='white' style='background:rgb(255, 255, 255); border:solid 0px rgb(255, 255, 255); border-radius:0px; padding:0px 0px 0px 1px;'>\n<div id='text_slider' class='owl-carousel sa_owl_theme owl-pagination-true' data-slider-id='text_slider' style='visibility: visible;visibility:visible;'>\n<div id='text_slider_slide01' class='sa_hover_container' data-hash='Setting-the-context' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>4.1 <b>Setting the context<\/b><\/strong><\/h2>\r\n<p><img fetchpriority=\"high\" decoding=\"async\" class=\"aligncenter wp-image-77032 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Setting-the-context.png\" alt=\"Setting the context\" width=\"859\" height=\"703\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Setting-the-context.png 859w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Setting-the-context-300x246.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Setting-the-context-768x629.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Setting-the-context-50x41.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Setting-the-context-100x82.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Setting-the-context-150x123.png 150w\" sizes=\"(max-width: 859px) 100vw, 859px\" \/><\/p>\r\n<p>In the previous chapter, we were introduced to a simple forward contract \u2013 a type of derivative instrument that requires two parties to enter an agreement to buy\/sell goods for a predetermined price on a specific future date.\u00a0We saw how forward contracts could profit from accurately predicting the movement of prices but also studied the significant risks that they pose to both long and short positions.\u00a0In particular, we identified four key disadvantages of forward contracts:\u00a0<\/p>\r\n<p>Liquidity risk \u2013 the seller cannot easily find a buyer or vice versa\u00a0Default risk \u2013 one of the parties can refuse to perform their obligation\u00a0<\/p>\r\n<p>Regulatory risk \u2013 less regulation is associated with the forward contracts, making them riskier\u00a0<\/p>\r\n<p>Structural rigidity \u2013 the contract is rigid and hard to change\u00a0The financial market created a more sophisticated type of forward contract to address the aforementioned problems and allow investors to participate in the price movements of various assets.\u00a0<\/p>\r\n<p>This improved tool is known as a futures contract and, similarly to a forward, allows for taking a long or short position.\u00a0At the same time, futures are standardized contracts traded on an exchange, where they are guarded by a clearinghouse and have no counterparties.\u00a0The comparison between the two instruments is similar to a handwritten invoice and a digital payment system \u2013 the underlying function remains the same, but the implementation is dramatically different, offering additional benefits such as speed and security.\u00a0<\/p>\r\n<p>In addition, the differences can be highlighted with the analogy of calling for a taxi.\u00a0Whereas a forward contract is similar to calling for a driver without knowing much about their reputation, the futures contract allows for apps and customer support.\u00a0<\/p>\r\n<p>Thus, the futures market does not remove any of the fundamental advantages of the forward contract but instead provides an enhanced system that neutralizes all risks while maintaining the opportunity to profit from both up and down movements of prices.<\/p><\/div>\n<div id='text_slider_slide02' class='sa_hover_container' data-hash='A-sneak-peek-into-the-Futures-Agreement' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>4.2 <b>A sneak peek into the Futures Agreement<\/b><\/strong><\/h2>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-77033 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/A-Sneak-Peak-in-to-the-Futures-Agreement-1.png\" alt=\"A Sneak Peak in to the Futures Agreement\" width=\"864\" height=\"879\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/A-Sneak-Peak-in-to-the-Futures-Agreement-1.png 864w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/A-Sneak-Peak-in-to-the-Futures-Agreement-1-295x300.png 295w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/A-Sneak-Peak-in-to-the-Futures-Agreement-1-768x781.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/A-Sneak-Peak-in-to-the-Futures-Agreement-1-50x50.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/A-Sneak-Peak-in-to-the-Futures-Agreement-1-98x100.png 98w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/A-Sneak-Peak-in-to-the-Futures-Agreement-1-150x153.png 150w\" sizes=\"(max-width: 864px) 100vw, 864px\" \/><\/p>\r\n<p>Futures contracts have evolved from forward agreements.\u00a0Both allow you to set a price for the future, but Futures contracts have structure, availability and safety.\u00a0Let&#8217;s see how they are different with the help of examples:\u00a0<\/p>\r\n<ol>\r\n<li>Tracks the Underlying AssetFutures prices are related to movement of the asset they are tracking.\u00a0For example, if Crude oil goes up in spot market, Crude oil Futures on MCX will also go up.\u00a0Whatever the underlying does , the futures contract reflects .\u00a0They are like mirror twins .<\/li>\r\n<li>Standard AgreementsFutures are standardised .\u00a0Forwards are a contract between two parties that can be for any quantity or quality .\u00a0For example one lot of Silver Futures could always be 30kg of 99.9% purity.\u00a0You don&#8217;t negotiate, you just plug and play.\u00a0<\/li>\r\n<li>Easy to TradeFutures can be traded anytime before the expiry.\u00a0Suppose , you buy Tata Steel Futures because you think prices will go up.\u00a0But your view changes , you can exit the position by selling the contract .\u00a0You don&#8217;t have to wait till the end.\u00a0<\/li>\r\n<li>SEBI RegulatedThe futures market in India is regulated by SEBI and it ensures smooth functioning of the same.\u00a0This means trades are monitored, defaults are infrequent and investors are protected.\u00a0<\/li>\r\n<li>Limited Time ContractsA future has a fixed duration, which could be 1 month, 2 months or 3 months.\u00a0If you are expecting USD\/INR to go up in 2 months then you can choose the matching contract.\u00a0The end date is the expiration.\u00a0\u00a0Settlement in Cash\u00a0Most futures are cash settled.\u00a0For instance, if you have Nifty Futures and the index goes up, you get the profit in cash, no need to delivery of shares.<\/li>\r\n<\/ol>\r\n<p><strong><b>Quick Comparison Table<\/b><\/strong><\/p>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>\r\n<p><strong><b>Feature<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Forward Contract<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Futures Contract<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Trading Venue<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>Private (OTC)<\/p>\r\n<\/td>\r\n<td>\r\n<p>Exchange (NSE, MCX)<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Customization<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>Fully negotiable<\/p>\r\n<\/td>\r\n<td>\r\n<p>Fixed and standardized<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Counterparty Risk<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>High<\/p>\r\n<\/td>\r\n<td>\r\n<p>Minimal (clearing house guarantees)<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Regulation<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>Unregulated<\/p>\r\n<\/td>\r\n<td>\r\n<p>Regulated by SEBI<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Transfer-ability<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>Not transferable<\/p>\r\n<\/td>\r\n<td>\r\n<p>Freely tradable<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Time Frames<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>Single, fixed<\/p>\r\n<\/td>\r\n<td>\r\n<p>Multiple expiry options<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Settlement<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>Physical or cash<\/p>\r\n<\/td>\r\n<td>\r\n<p>Mostly cash-settled<\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p><strong><b>\u00a0<\/b><\/strong><\/p><\/div>\n<div id='text_slider_slide03' class='sa_hover_container' data-hash='Product-type' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>4.3 <\/strong><strong><b>P<\/b><\/strong><strong><b>roduct type<\/b><\/strong><\/h2>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-77034 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Product-Type-1.png\" alt=\"Product Type\" width=\"845\" height=\"862\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Product-Type-1.png 845w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Product-Type-1-294x300.png 294w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Product-Type-1-768x783.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Product-Type-1-50x50.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Product-Type-1-98x100.png 98w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Product-Type-1-150x153.png 150w\" sizes=\"(max-width: 845px) 100vw, 845px\" \/><\/p>\r\n<p>A product type must be selected when placing any Futures orders.\u00a0The product type defines the risk appetite, holding period, and margin requirements.\u00a0Broker provides four types of products:\u00a0<\/p>\r\n<ol>\r\n<li><b><\/b><strong><b>NRML (Normal)<\/b><\/strong><b><\/b><strong><b>: <\/b><\/strong>Used for position trading or holding positions overnight\u00a0Full margin is required as per exchange\u00a0No auto square off, you have to manually adjust or carry forward the positions.\u00a0<\/li>\r\n<li><b><\/b><strong><b>MIS (Margin Intraday Square-off)<\/b><\/strong><strong><b>: <\/b><\/strong>Used for intraday trading\u00a0It has a lower margin requirement as compared to NRML (as decided by the broker).\u00a0Position gets auto-square off at the end of the day.\u00a0<\/li>\r\n<li><b><\/b><strong><b>CO (Cover Order)<\/b><\/strong><strong><b>:<\/b><\/strong>It is used for intraday trading but with a compulsory stop loss order attached to it\u00a0It has a relatively higher leverage\u00a0Auto-square off and stop loss protection features reduce the risk factor\u00a0<\/li>\r\n<li><b><\/b><strong><b>BO (Bracket Order) (if available with the broker)<\/b><\/strong><strong><b>:<\/b><\/strong><b><\/b>Trading in Bracket Order has the following features:\u00a0It is also an intraday product wherein orders are placed with a pre-defined entry, stop loss and target.\u00a0Best suited for disciplined traders as it has Bracket Risk Reward Ratio and Auto squaring off.\u00a0<\/li>\r\n<\/ol>\r\n<p><strong><b>Why it is important to understand the product type?<\/b><\/strong><\/p>\r\n<p>\u00a0Just like different cars have different features and fuel efficiencies; different product types have different risk appetites, capital requirements and position holding period.\u00a0Risk\u00a0CO and BO orders have a stop loss feature thus reducing the overall risk as compared to NRML which has no stop loss and thus the risk is comparatively higher.\u00a0MIS and CO have lower margin requirements as compared to NRML.\u00a0Capital\u00a0MIS and CO require lesser margins as compared to NRML.\u00a0Time Horizon\u00a0NRML is a multi-day product whereas MIS, CO and BO are intraday products<\/p><\/div>\n<div id='text_slider_slide04' class='sa_hover_container' data-hash='Understanding-Leverage-in-Futures' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>4.4 <b>Understanding Leverage in Futures<\/b><\/strong><\/h2>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-77035 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Understanding-Leverage-in-Futures-1.png\" alt=\"Understanding Leverage in Futures\" width=\"884\" height=\"870\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Understanding-Leverage-in-Futures-1.png 884w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Understanding-Leverage-in-Futures-1-300x295.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Understanding-Leverage-in-Futures-1-768x756.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Understanding-Leverage-in-Futures-1-50x50.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Understanding-Leverage-in-Futures-1-100x98.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Understanding-Leverage-in-Futures-1-150x148.png 150w\" sizes=\"(max-width: 884px) 100vw, 884px\" \/><\/p>\r\n<p>&nbsp;<\/p>\r\n<p>In fact, you do not pay the full value of the contract while trading Futures in the Futures market.\u00a0Your broker allows you to take a position in the market by paying only a certain percentage of the total value of the contract.\u00a0This facility provided by the broker to the trader is called leverage.\u00a0Leverage is a tool offered by a broker to you which lets you take bigger positions on small amounts of money.\u00a0So it is important that you learn about leverage early on in your trading journey.\u00a0<\/p>\r\n<p>Your Access to Contract Value\u00a0To get access to a bigger value of a contract you need to pay an initial margin to your broker.\u00a0<\/p>\r\n<h3><strong>What is an Initial Margin?\u00a0<\/strong><\/h3>\r\n<p>An initial margin is a deposit that needs to be paid to open a future contract.\u00a0This is a form of security deposit to the exchange which ensures that the trader can meet all obligations under the contract.\u00a0The margin is decided by the exchange and depends on the value of the underlying asset.\u00a0The initial margin acts as leverage because it allows you to take a bigger position in the market with less money.<\/p>\r\n<p><strong><b>Example: Nifty Futures<\/b><\/strong><\/p>\r\n<p>Suppose the Nifty Futures contract has the following details:<\/p>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>\r\n<p><strong><b>Contract Value<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Initial Margin<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Leverage Ratio<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p>\u20b910,00,000<\/p>\r\n<\/td>\r\n<td>\r\n<p>\u20b91,00,000<\/p>\r\n<\/td>\r\n<td>\r\n<p>10x<\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p>This implies that \u20b91,00,000 will give you a leverage of 10x which will allow you to take a position of \u20b910,00,000.\u00a0Why is it important to learn about leverage early on?\u00a0Since Futures contracts are always traded on leverage it is important that you understand margins before understanding payoffs of a Futures contract.\u00a0By learning about leverage you will also learn about mark-to-market settlements and risk management.\u00a0And this gives you confidence to trade responsibly.<\/p>\r\n<p><strong><b>\u00a0<\/b><\/strong><\/p><\/div>\n<div id='text_slider_slide05' class='sa_hover_container' data-hash='Important-Concepts-Before-Trading-Futures' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>4.5 <b>Important Concepts Before Trading Futures<\/b><\/strong><\/h2>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-77036 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Key-Concepts-before-you-trade-futures-1.png\" alt=\"Key Concepts before you trade futures\" width=\"914\" height=\"637\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Key-Concepts-before-you-trade-futures-1.png 914w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Key-Concepts-before-you-trade-futures-1-300x209.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Key-Concepts-before-you-trade-futures-1-768x535.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Key-Concepts-before-you-trade-futures-1-50x35.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Key-Concepts-before-you-trade-futures-1-100x70.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Key-Concepts-before-you-trade-futures-1-150x105.png 150w\" sizes=\"(max-width: 914px) 100vw, 914px\" \/><\/p>\r\n<p>Before getting into the mechanics of Futures trading, there are some jargon that you need to be familiar about.\u00a0This will help you in getting a fair idea of how to go about your first trade.\u00a0<\/p>\r\n<p><strong><b>Lot Size \u2013<\/b><\/strong>\u00a0The Minimum Trading Unit\u00a0Unlike the cash market, you can buy or sell only in a certain pre-defined quantity of a particular asset.\u00a0For example, Nifty Futures have a lot size of 50 while crude oil futures may have 100 barrels as their lot size.\u00a0You can\u2019t buy 1 unit or 1 barrel of any given asset.\u00a0You need to mandatory\u00a0trade in the minimum lot size.\u00a0<\/p>\r\n<p><strong><b>Contract Value <\/b><\/strong>\u2013 Total Value of Contract\u00a0This is the value that you will get upon buying\/selling a particular asset.\u00a0The contract value is calculated as the lot size multiplied by the price of that asset.\u00a0So, for example, Tata Motors Futures have a lot size of 1500 shares (at 650Rs per share) would stand at 650 x 1500 = 9,75 = 975,000Rs.\u00a0So, it will give us an idea about the total exposure.\u00a0<\/p>\r\n<p><strong><b>Margin \u2013<\/b><\/strong>\u00a0Your Ticket\u00a0Unlike the cash market, you need not pay full amount to buy any particular asset.\u00a0You need to pay only a certain percentage (20%) of the value of the contract as a margin.\u00a0Say, if your contract value stands at 10 lakh, you can buy it by paying just 2 lakh as a margin.\u00a0<\/p>\r\n<p><strong><b>Expiry <\/b><\/strong>\u2013 The Term of the Agreement\u00a0All futures contract have an expiry date upon which they expire.\u00a0Expiry is normally the last Thursday of the month, as per the Indian markets.\u00a0The contracts are available for 1 month, 2 month and 3 month duration.\u00a0Upon expiry, new contracts are introduced in place of the expiring ones.\u00a0So if one were to take a long position in Gold Futures for the next two months, he\/she would have to buy a two-month contract.<\/p><\/div>\n<div id='text_slider_slide06' class='sa_hover_container' data-hash='Key-Points' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>\u00a04.6 <b>Key Point<\/b><b>s<\/b><\/strong><\/h2>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-76118 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-4.png\" alt=\"Key Takeaways\" width=\"444\" height=\"418\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-4.png 444w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-4-300x282.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-4-50x47.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-4-100x94.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Key-Takeaways-4-150x141.png 150w\" sizes=\"(max-width: 444px) 100vw, 444px\" \/><\/p>\r\n<ol>\r\n<li>Futures are better than forward contracts .Risk of default, non-liquid and no regulation is gone but the basic idea of locking in future prices is still there.\u00a0<\/li>\r\n<li>The futures contract has a close relationship with the underlying asset The price of a futures contract moves in tandem with the spot price of the underlying asset be it gold, crude oil or Nifty.<\/li>\r\n<li>Standardisation is a key feature.Futures contracts are standard, i.e.\u00a0parameters are fixed (lot size, expiry, quality of asset).\u00a0This makes them more easily traded and compared to forwards.\u00a0<\/li>\r\n<li>Futures traded on exchanges Futures are traded on exchanges like NSE or MCX and it gives them the advantage of transparency and liquidity.Forwards are private deals though unlike.\u00a0<\/li>\r\n<li>India\u2019s SEBI-regulated futures market The failure reduces the risk to counterparties and ensures that participants are treated fairly.<\/li>\r\n<li>Futures contracts can be traded before expiry.Unlike in the case of forward contracts, traders can exit their positions by selling the contract anytime.\u00a0<\/li>\r\n<li>Futures are time bound i.e.have a fixed period of time.\u00a0Contracts have a specific time period normally 1, 2 or 3 months and expire on a specific date normally the last Thursday of the month.\u00a0<\/li>\r\n<li>Cash settlement Most futures are cash settled Traders prefer to settle their profits or losses in cash rather than the actual goods.<\/li>\r\n<li>Lot size governing minimum trading unit There is a standard size for each futures contract .Example : Lot size in Nifty Futures is 50 units.\u00a0<\/li>\r\n<li>A futures trade requires margin to enter.The traders have to post a margin, which is a fraction of the contract value.This enables them to control large positions with small amounts of capital .<\/li>\r\n<\/ol><\/div>\n<div id='text_slider_slide07' class='sa_hover_container' data-hash='Fun-Activity' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>4.7\u00a0 Fun Activity<\/strong><\/h2>\r\n<h2><strong><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-77015 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-1.png\" alt=\"Fun Activity\" width=\"867\" height=\"1033\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-1.png 867w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-1-252x300.png 252w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-1-859x1024.png 859w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-1-768x915.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-1-42x50.png 42w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-1-84x100.png 84w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/03\/Fun-Activity-1-150x179.png 150w\" sizes=\"(max-width: 867px) 100vw, 867px\" \/><\/strong><\/h2>\r\n<p>Below are 5 short statements. Decide whether each describes a Forward Contract or a Futures Contract.<\/p>\r\n<ol>\r\n<li>Traded privately between two parties.<\/li>\r\n<li>Regulated by SEBI and traded on NSE or MCX.<\/li>\r\n<li>Terms like quantity and quality are fully negotiable.<\/li>\r\n<li>Can be exited anytime before expiry.<\/li>\r\n<li>Comes with fixed lot size and expiry date.<\/li>\r\n<\/ol>\r\n<p><strong><b>Answers:<\/b><\/strong><\/p>\r\n<ol>\r\n<li>Forward<\/li>\r\n<li>Futures<\/li>\r\n<li>Forward<\/li>\r\n<li>Futures<\/li>\r\n<li>Futures<\/li>\r\n<\/ol>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p><\/div>\n<\/div>\n<\/div>\n<script type='text\/javascript'>\n\tjQuery(document).ready(function() {\n\t\tjQuery('#text_slider').owlCarousel({\n\t\t\titems : 1,\n\t\t\tsmartSpeed : 400,\n\t\t\tautoplay : false,\n\t\t\tautoplayHoverPause : false,\n\t\t\tsmartSpeed : 400,\n\t\t\tfluidSpeed : 400,\n\t\t\tautoplaySpeed : 400,\n\t\t\tnavSpeed : 400,\n\t\t\tdotsSpeed : 400,\n\t\t\tdotsEach : 1,\n\t\t\tloop : false,\n\t\t\tnav : true,\n\t\t\tnavText : ['Previous','Next'],\n\t\t\tdots : true,\n\t\t\tresponsiveRefreshRate : 200,\n\t\t\tslideBy : 2,\n\t\t\tmergeFit : true,\n\t\t\tautoHeight : true,\n\t\t\tmouseDrag : false,\n\t\t\ttouchDrag : true\n\t\t});\n\t\tjQuery('#text_slider').css('visibility', 'visible');\n\t\tvar owl_goto = jQuery('#text_slider');\n\t\tjQuery('.text_slider_goto1').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 0);\n\t\t});\n\t\tjQuery('.text_slider_goto2').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 1);\n\t\t});\n\t\tjQuery('.text_slider_goto3').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 2);\n\t\t});\n\t\tjQuery('.text_slider_goto4').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 3);\n\t\t});\n\t\tjQuery('.text_slider_goto5').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 4);\n\t\t});\n\t\tjQuery('.text_slider_goto6').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 5);\n\t\t});\n\t\tjQuery('.text_slider_goto7').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 6);\n\t\t});\n\t\tvar resize_21081 = jQuery('.owl-carousel');\n\t\tresize_21081.on('initialized.owl.carousel', function(e) {\n\t\t\tif (typeof(Event) === 'function') {\n\t\t\t\twindow.dispatchEvent(new Event('resize'));\n\t\t\t} else {\n\t\t\t\tvar evt = window.document.createEvent('UIEvents');\n\t\t\t\tevt.initUIEvent('resize', true, false, window, 0);\n\t\t\t\twindow.dispatchEvent(evt);\n\t\t\t}\n\t\t});\n\t});\n<\/script>\n<\/p>                    <\/div>\n\t\t        \n                    <div id=\"slides-tab\" class=\"clearfix eael-tab-content-item \" data-title-link=\"slides-tab\">\n\t\t\t\t        <p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-11528 aligncenter\" src=\"http:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png\" alt=\"\" width=\"612\" height=\"408\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png 612w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview-300x200.png 300w\" sizes=\"(max-width: 612px) 100vw, 612px\" \/><\/p>                    <\/div>\n\t\t        \n                    <div id=\"videos-tab\" class=\"clearfix eael-tab-content-item \" data-title-link=\"videos-tab\">\n\t\t\t\t        <p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-11528 size-full\" src=\"http:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png\" alt=\"\" width=\"612\" height=\"408\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png 612w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview-300x200.png 300w\" sizes=\"(max-width: 612px) 100vw, 612px\" \/><\/p>                    <\/div>\n\t\t                    <\/div>\n        <\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>Study Slides Videos 4.1 Introduction To Futures Contract A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future. Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange. The buyer of a &#8230; <a title=\"Explore The Futures Contract in Detail\" class=\"read-more\" href=\"https:\/\/www.5paisa.com\/finschool\/course\/equity-derivatives-course\/futures-contract\/\" aria-label=\"Read more about Explore The Futures Contract in Detail\">Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"parent":21115,"menu_order":4,"comment_status":"closed","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[],"class_list":["post-21130","markets","type-markets","status-publish","format-standard","hentry"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/21130","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets"}],"about":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/types\/markets"}],"author":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/comments?post=21130"}],"version-history":[{"count":10,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/21130\/revisions"}],"predecessor-version":[{"id":38472,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/21130\/revisions\/38472"}],"up":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/21115"}],"wp:attachment":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/media?parent=21130"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/categories?post=21130"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}