Contract specifications of futures contracts

A futures contract is a standardized agreement to buy or sell an underlying asset at a predetermined price on a future date. Standardisation means every contract of a given series has identical specifications, which enables easy trading on exchanges like NSE and BSE.

These specifications are defined by the exchange and overseen by SEBI. They include the underlying asset, contract size, tick size, contract months, settlement type, margin requirements, and daily price limits. Because they are uniform, market participants can compare contracts across different assets without negotiating terms.

For the NISM exam, you will be asked to match a contract description to its specification, compute the contract value, or identify the correct last trading day. Remember that any deviation from the official specification makes a contract non‑standard and therefore not tradable on the exchange.

The underlying asset is the security on which the futures contract is based – for equity futures, this is a listed equity, index, or a basket of equities. The contract size (also called lot size) specifies how many units of the underlying are bought or sold per contract.

For example, the Nifty 50 index futures have a contract size of 75 units. If the index is quoted at 18,000 points, the notional value of one contract is 75 × 18,000 = 1,350,000 points, which is later converted to rupees using the index multiplier.

Exam relevance: Questions often give the contract size and ask for the notional exposure or the cash value of a price move. Confusing contract size with the exchange‑wide lot size (which may differ for each asset) is a frequent mistake.

The tick size is the minimum price movement allowed for a futures contract. It is expressed in points for index futures and in rupees for stock futures.

The tick value translates that price movement into a monetary amount: Tick Value = Tick Size × Contract Size. This tells you how much profit or loss you incur for each tick the price moves.

In NIFTY futures, the tick size is 0.05 points. With a contract size of 75, the tick value is 0.05 × 75 = ₹3.75. Knowing the tick value is essential for calculating P&L and for setting stop‑loss levels in exam problems.

Futures contracts are listed for specific contract months – usually the nearest four months and a few quarterly months. The contract expires on the last Thursday of the contract month, subject to the exchange’s calendar.

The last trading day is typically the day before expiry (i.e., the last business day prior to the expiry Thursday). After this day, no new trades are allowed, but open positions are settled on the expiry date.

Exam tip: Questions may present a date and ask whether it is a last trading day, expiry day, or settlement day. Remember the hierarchy – last trading day < last expiry day < settlement day (for cash‑settled contracts).

Indian equity index futures settle in cash based on the final settlement price, which is the volume‑weighted average price (VWAP) of the underlying index during a pre‑defined window on the expiry day.

Stock futures may settle physically, meaning the seller delivers the actual shares to the buyer on the settlement date. The exchange mandates a delivery guarantee and a settlement guarantee fund to protect participants.

For the exam, you may be asked to identify the settlement method from a contract specification table or to compute cash settlement amount using the final settlement price.

Initial margin is the upfront collateral required to open a futures position. SEBI prescribes a minimum percentage (usually 10‑15% of contract value) which the exchange may adjust based on volatility.

Variation margin is the daily profit or loss that is settled each trading day. If your position incurs a loss, you must add funds to maintain the required margin level.

Position limits cap the maximum open interest an individual or entity can hold in a particular contract, preventing market manipulation. The limits are expressed as a percentage of the total open interest for that contract.

Daily price limits (circuit breakers) restrict the maximum upward or downward movement of a futures price in a single trading session, typically set at 10% of the previous day's settlement price for equity index futures.