ફ્યુચર્સ કોન્ટ્રાક્ટ વિગતવાર જુઓ

4.1 Setting the context

In the previous chapter, we were introduced to a simple forward contract – 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. We 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. In particular, we identified four key disadvantages of forward contracts: 

Liquidity risk – the seller cannot easily find a buyer or vice versa Default risk – one of the parties can refuse to perform their obligation 

Regulatory risk – less regulation is associated with the forward contracts, making them riskier 

Structural rigidity – the contract is rigid and hard to change The 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. 

This improved tool is known as a futures contract and, similarly to a forward, allows for taking a long or short position. At the same time, futures are standardized contracts traded on an exchange, where they are guarded by a clearinghouse and have no counterparties. The comparison between the two instruments is similar to a handwritten invoice and a digital payment system – the underlying function remains the same, but the implementation is dramatically different, offering additional benefits such as speed and security. 

In addition, the differences can be highlighted with the analogy of calling for a taxi. Whereas 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. 

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.

4.2 A sneak peek into the Futures Agreement

Futures contracts have evolved from forward agreements. Both allow you to set a price for the future, but Futures contracts have structure, availability and safety. Let’s see how they are different with the help of examples:

1. Tracks the Underlying AssetFutures prices are related to movement of the asset they are tracking. For example, if Crude oil goes up in spot market, Crude oil Futures on MCX will also go up. Whatever the underlying does , the futures contract reflects . They are like mirror twins .
2. Standard AgreementsFutures are standardised . Forwards are a contract between two parties that can be for any quantity or quality . For example one lot of Silver Futures could always be 30kg of 99.9% purity. You don’t negotiate, you just plug and play.
3. Easy to TradeFutures can be traded anytime before the expiry. Suppose , you buy Tata Steel Futures because you think prices will go up. But your view changes , you can exit the position by selling the contract . You don’t have to wait till the end.
4. SEBI RegulatedThe futures market in India is regulated by SEBI and it ensures smooth functioning of the same. This means trades are monitored, defaults are infrequent and investors are protected. 
5. Limited Time ContractsA future has a fixed duration, which could be 1 month, 2 months or 3 months. If you are expecting USD/INR to go up in 2 months then you can choose the matching contract. The end date is the expiration. Settlement in Cash Most futures are cash settled. For instance, if you have Nifty Futures and the index goes up, you get the profit in cash, no need to delivery of shares.

Quick Comparison Table

4.3 Product type

A product type must be selected when placing any Futures orders. The product type defines the risk appetite, holding period, and margin requirements. Broker provides four types of products: 

1. NRML (Normal): Used for position trading or holding positions overnight Full margin is required as per exchange No auto square off, you have to manually adjust or carry forward the positions. 
2. MIS (Margin Intraday Square-off): Used for intraday trading It has a lower margin requirement as compared to NRML (as decided by the broker). Position gets auto-square off at the end of the day. 
3. CO (Cover Order):It is used for intraday trading but with a compulsory stop loss order attached to it It has a relatively higher leverage Auto-square off and stop loss protection features reduce the risk factor 
4. BO (Bracket Order) (if available with the broker):Trading in Bracket Order has the following features: It is also an intraday product wherein orders are placed with a pre-defined entry, stop loss and target. Best suited for disciplined traders as it has Bracket Risk Reward Ratio and Auto squaring off. 

Why it is important to understand the product type?

 Just like different cars have different features and fuel efficiencies; different product types have different risk appetites, capital requirements and position holding period. Risk CO 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. MIS and CO have lower margin requirements as compared to NRML. Capital MIS and CO require lesser margins as compared to NRML. Time Horizon NRML is a multi-day product whereas MIS, CO and BO are intraday products

4.4 Understanding Leverage in Futures

In fact, you do not pay the full value of the contract while trading Futures in the Futures market. Your broker allows you to take a position in the market by paying only a certain percentage of the total value of the contract. This facility provided by the broker to the trader is called leverage. Leverage is a tool offered by a broker to you which lets you take bigger positions on small amounts of money. So it is important that you learn about leverage early on in your trading journey. 

Your Access to Contract Value To get access to a bigger value of a contract you need to pay an initial margin to your broker. 

What is an Initial Margin? 

An initial margin is a deposit that needs to be paid to open a future contract. This is a form of security deposit to the exchange which ensures that the trader can meet all obligations under the contract. The margin is decided by the exchange and depends on the value of the underlying asset. The initial margin acts as leverage because it allows you to take a bigger position in the market with less money.

Example: Nifty Futures

Suppose the Nifty Futures contract has the following details:

This implies that ₹1,00,000 will give you a leverage of 10x which will allow you to take a position of ₹10,00,000. Why is it important to learn about leverage early on? Since Futures contracts are always traded on leverage it is important that you understand margins before understanding payoffs of a Futures contract. By learning about leverage you will also learn about mark-to-market settlements and risk management. And this gives you confidence to trade responsibly.

4.5 Important Concepts Before Trading Futures

Before getting into the mechanics of Futures trading, there are some jargon that you need to be familiar about. This will help you in getting a fair idea of how to go about your first trade. 

લૉટની સાઇઝ – The Minimum Trading Unit Unlike the cash market, you can buy or sell only in a certain pre-defined quantity of a particular asset. For example, Nifty Futures have a lot size of 50 while crude oil futures may have 100 barrels as their lot size. You can’t buy 1 unit or 1 barrel of any given asset. You need to mandatory trade in the minimum lot size. 

કરારનું મૂલ્ય – Total Value of Contract This is the value that you will get upon buying/selling a particular asset. The contract value is calculated as the lot size multiplied by the price of that asset. So, 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. So, it will give us an idea about the total exposure. 

માર્જિન – Your Ticket Unlike the cash market, you need not pay full amount to buy any particular asset. You need to pay only a certain percentage (20%) of the value of the contract as a margin. Say, if your contract value stands at 10 lakh, you can buy it by paying just 2 lakh as a margin. 

સમાપ્તિ – The Term of the Agreement All futures contract have an expiry date upon which they expire. Expiry is normally the last Thursday of the month, as per the Indian markets. The contracts are available for 1 month, 2 month and 3 month duration. Upon expiry, new contracts are introduced in place of the expiring ones. So 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.

 4.6 કી પૉઇન્ટએસ

1. 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. 
2. 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.
3. Standardisation is a key feature.Futures contracts are standard, i.e. parameters are fixed (lot size, expiry, quality of asset). This makes them more easily traded and compared to forwards. 
4. 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. 
5. India’s SEBI-regulated futures market The failure reduces the risk to counterparties and ensures that participants are treated fairly.
6. Futures contracts can be traded before expiry.Unlike in the case of forward contracts, traders can exit their positions by selling the contract anytime. 
7. Futures are time bound i.e.have a fixed period of time. Contracts have a specific time period normally 1, 2 or 3 months and expire on a specific date normally the last Thursday of the month. 
8. Cash settlement Most futures are cash settled Traders prefer to settle their profits or losses in cash rather than the actual goods.
9. Lot size governing minimum trading unit There is a standard size for each futures contract .Example : Lot size in Nifty Futures is 50 units. 
10. 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 .

4.7 મજેદાર પ્રવૃત્તિ

Below are 5 short statements. Decide whether each describes a Forward Contract or a Futures Contract.

1. Traded privately between two parties.
2. Regulated by SEBI and traded on NSE or MCX.
3. Terms like quantity and quality are fully negotiable.
4. Can be exited anytime before expiry.
5. Comes with fixed lot size and expiry date.

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