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Future Contracts Types And Much More

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Published Date: 20 Apr 2023Updated Date: 05 Dec 20236 mins readBy MOFSL
Future Contracts

The concept of futures and options are widely known to traders and investors in the stock and derivatives markets. Futures have a wide use in different markets and these are contracts that help traders and investors to hedge against volatility in prices and dynamic price changes. Speculators, too, use futures to make the most of movements in price. While dealing with futures contracts, in particular, types of futures contracts exist, and some may give more advantages than others. 

Basics About Futures

It is important to get your basics about futures right before you delve into the types of futures contracts available. A futures contract is basically an agreement which is made between two parties. It gives a buyer, or a seller, the right to purchase or sell any particular asset (as specified in the contract), the underlying asset, at a certain fixed date in the future. The underlying asset in a futures contract could be a number of stocks, or commodities, or any other asset. Furthermore, in a futures contract, as opposed to an options contract, the buyer or the seller has, not just the right to buy or sell the contract, but the obligation to do so once the date of expiry is reached.   

In the segments of commodities and finance, types of commodities exist. Some of these types of commodities futures include gold, agricultural products, cotton, natural gas, oilseed and so on and so forth. In the financial segment, types of futures contracts may have stock, an index, interest rate and currency as the underlying asset. Essentially, the underlying asset determines the type of futures contract. It’s helpful to know about these types as they give investors insights about the contracts themselves and how they can be made the most of. 

Types of Futures Contracts

Knowing about the different types of futures can give you some idea of how they function and their use. Here are some of the key types of futures contracts: 

  • Stock Futures

Between 2000-2001, the National Stock Exchange (NSE) launched index options that were based on the NIFTY 50 index (then called the S&P CNX NIFTY) for the purposes of investing and trading. After this, the NSE established single stock futures and options on securities which were listed in the stock exchanges. Investors have many advantages while trading in stock futures. The largest of these is they get leverage. In advance of trading in stock futures, investors must deposit a margin as an initial amount with a broker. Say, if this initial margin is 10%, it is possible for an investor to trade in Rs. 50 lakh worth of futures contracts by depositing just Rs. 5 lakh with a broker. The greater the volume of transactions, the more the profit will be. Nonetheless, there are some risks too. You can trade stock futures on the NSE and BSE today, but these are available only for a certain list of stocks. 

  • Currency Futures

While speaking about types of futures contracts, currency futures have to do with futures contracts with the underlying asset being a currency pair. Therefore, in this type of futures contract, buyers or sellers are permitted to buy or sell a currency at a particular rate against another currency, like say, the USD vs the Euro, at a pre-fixed date in the future. These kinds of futures contracts are used as hedges for risks. For instance, an Indian importer may purchase USD (US Dollar) futures as a guard against any currency appreciation against, say, the INR (Indian Rupee). 

  • Index Futures

Index futures have any one of the indices as the underlying asset in a futures contract. If investors are interested in speculating on any of the indices, like the Nifty or Sensex, they may deal with index futures. Some of the types of futures contracts which include indices in India have either the Sensex, Nifty Bank, Nifty 50, Nifty IT, and others as the underlying asset of the futures contract. 

  • Commodity Futures

Commodity futures give investors the advantage of hedging against changes in price in the future of a range of commodities. So, you can have various types of futures contracts linked  with different commodities as the underlying assets, respectively. The commodities that may be included are silver, gold, agricultural products, petroleum, oil, etc. Speculators may effectively use these kinds of futures to bet on movements in price. Generally speaking, commodity markets may display a great deal of volatility and are mainly the domain of huge institutional investors. These may include private entities as well as governments. In commodities futures, initial margins are typically low, so significant positions can be taken by investors. The potential for profit may be massive, but there are, as with any trading activity, risks involved too. 

In India, futures in commodities are traded on the National Commodity & Derivatives Exchange and on the Multi-Commodity Exchange (MCX). 

  • Interest Rate Futures

In types of futures contracts, an interest rate future contract involves a debt instrument as the underlying asset. This could be a government bond or a treasury bill. These can be traded on the BSE and the NSE. 

Make a Bet on the Future

Some investments come with risks, especially those that are to do with trading activity in the stock markets. However, in terms of futures contracts, this risk may be mitigated, and you may consider investing in small amounts initially. If you open a demat account today to invest in the stock or commodity markets, you can try futures contracts after doing some due diligence. While you are going about this, you may come across a potentially lucrative upcoming IPO to invest in. 

 

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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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