Futures Contract - Definition, Attributes & Example
What is a Futures Contract?
A Futures Contract is a legally binding agreement to buy or sell a specific asset (like a stock, gold, or oil) at a pre-decided price on a fixed date in the future.
The Key Point: Once you sign this promise, you must fulfill it. Unlike an option, you don't have a choice to walk away. If the price goes against you, you still have to honor the deal at the price you locked in.
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The 5 Main Attributes of a Futures Contract
Every futures contract is Standardized. This means the exchange (like the NSE) sets the rules so that everyone is trading the exact same thing.
Attribute
What it means
Underlying Asset
The real thing the contract is about (e.g., Nifty 50, Gold, or Relianceshares).
Lot Size
The minimum quantity you must trade. You can't buy 1 share; you must buy a box of shares (e.g., 65 units for Nifty).
Expiry Date
The deadline for the contract. In India, this is usually the last Thursday of the month.
Margin Money
A security deposit (usually 10%–20%) you pay to the exchange to show you can handle the trade.
Mark-to-Market (MTM)
A daily settlement where your profits or losses are added or subtracted from your account every evening.
Example
Let's look at a trade using the Nifty 50 Index.
- The Scenario: You think the Nifty (currently at 24,000) will go up by the end of the month.
- The Contract: You buy 1 Lot of Nifty January Futures.
- The Current Rules: The Nifty Lot Size is 65.
The Calculation:
- Contract Value: 24,000 X 65 =₹15,60,000. (This is the total value you are controlling).
- Margin Required: You don't pay ₹15.6 Lakhs. You only pay a 15% Margin, which is about ₹2,34,000.
- The Result:
If Nifty goes up to 24,100
- Point gain = 100
- Profit = 100 × 65 = ₹6,500
If Nifty falls to 23,900
- Point loss = 100
- Loss = 100 × 65 = ₹6,500
Why Use Futures?
- Lower Cost (Leverage): You can control a massive ₹15 Lakh position with just ₹2.3 Lakhs in your account. This power helps you make bigger profits with less money.
- Hedging: If you own ₹15 Lakhs worth of actual stocks and are scared they will fall, you can Sell a Nifty Future. If the market crashes, the profit from your Future trade will cover the loss in your stocks.
- No Storage Worries: You can trade the price of 1,000 barrels of oil without actually having to find a place to store all those barrels!
Conclusion
A futures contract is a powerful locked-in promise. It allows you to use leverageto trade large amounts of assets with a small deposit. While it is excellent for protecting your money (hedging) or making quick profits (speculation), it is also risky. Because of the daily Mark-to-Market, you must always keep enough cash in your account to handle small daily price moves.