Some important terminology associated with futures contracts

Contract Size is the quantity of the underlying asset that one futures contract represents. In Indian equity index futures, the contract size is expressed in units of the index (e.g., 75 units for Nifty). The size determines the monetary exposure of a single contract.

Tick Size denotes the minimum price movement allowed by the exchange for a futures contract. For most equity index futures, the tick size is 0.05 points. A change smaller than the tick size is not permissible, which influences the granularity of profit or loss calculations.

Tick Value converts the tick size into a rupee amount by multiplying the tick size with the contract size. For Nifty (tick size 0.05 × 75 = 3.75 rupees), each tick movement changes the contract value by ₹3.75. Knowing tick value is essential for quick P/L estimation during the exam.

• Contract Size – units of the underlying per contract.
• Tick Size – smallest permissible price change.
• Tick Value – rupee impact of one tick movement.

Settlement Price is the price used by the exchange to calculate daily mark‑to‑market gains or losses. It is usually the volume‑weighted average price of trades during the closing auction. This price, not the closing price of the underlying, determines margin adjustments.

Expiry Date marks the day on which the futures contract ceases to exist. For Indian index futures, expiry is the last Thursday of the contract month, unless that Thursday is a holiday, in which case the preceding business day becomes the expiry.

Last Trading Day (LTD) is the final day on which a participant can enter a new position or unwind an existing one. LTD is typically one business day before the expiry date for index futures. After LTD, positions are automatically settled based on the settlement price.

• Settlement Price – basis for daily MTM.
• Expiry Date – contract termination day.
• Last Trading Day – final day to trade the contract.

Initial Margin is the upfront collateral required to open a futures position. SEBI mandates a minimum percentage (typically 10‑15% of the contract value) that the clearing corporation collects from the trader.

Variation Margin (or daily margin) reflects the profit or loss arising from price movements between two consecutive settlement prices. It is settled each trading day through the mark‑to‑market process.

Mark‑to‑Market (MTM) is the daily adjustment of a trader’s margin account based on the variation margin. If the account falls below the maintenance margin, a margin call is triggered, requiring additional funds to restore the required level.

• Initial Margin – upfront collateral.
• Variation Margin – daily P/L based on price change.
• MTM – daily settlement of variation margin.

Long Position means the trader has bought a futures contract, anticipating that the underlying price will rise. The trader’s profit increases with a rise in the settlement price.

Short Position is the opposite; the trader sells a futures contract, expecting the underlying price to fall. Profit is realized when the settlement price declines.

Hedger uses futures to offset price risk in the spot market (e.g., a portfolio manager protecting equity exposure). Speculator seeks profit from price movements without holding the underlying asset. Arbitrageur exploits price discrepancies between related markets, ensuring risk‑free profit.

• Long – buy, profit on price rise.
• Short – sell, profit on price fall.
• Hedger – risk mitigation.
• Speculator – profit from movement.

Open Interest (OI) represents the total number of outstanding futures contracts that have not been settled. It increases when a new buyer and seller create a contract, and decreases when an existing contract is closed.

Volume is the number of contracts traded during a specific session. High volume indicates active trading, whereas rising OI suggests that new money is entering the market, often confirming a trend.

For the exam, remember that OI is a stock‑of‑contracts measure, while volume is a flow‑of‑contracts measure. Questions may ask you to interpret whether a price move is supported by increasing OI (trend confirmation) or decreasing OI (potential reversal).

• Open Interest – total open contracts.
• Volume – contracts traded in a session.

SEBI, through the Securities and Exchange Board of India, governs futures trading. Key regulatory requirements include daily mark‑to‑market, maintenance of a minimum margin, and reporting of large positions (above 0.5% of the underlying market). Failure to meet margin calls results in automatic position liquidation by the clearing corporation.

For the NISM exam, be prepared to answer questions on: (i) the daily MTM cycle, (ii) the difference between initial and maintenance margin, (iii) the role of the clearing corporation, and (iv) the reporting thresholds for large open interest positions.

Remember the exam often tests conceptual clarity rather than rote memorisation of exact percentages. Focus on the logical flow: contract specification → margin requirement → daily settlement → position closure.