Introduction to Futures

A futures contract is a standardized agreement to buy or sell a specified quantity of a commodity at a predetermined price on a future date. The contract is traded on a recognized exchange such as MCX, ensuring transparency, liquidity and a central clearing mechanism.

Standardisation means that every contract of a given commodity has the same lot size, tick size, expiry date and settlement procedure. Because the exchange acts as the counter‑party to both buyer and seller, participants are protected from default risk, which is a key point examined by SEBI.

For the NISM exam, remember that futures are marked‑to‑market daily, and the profit or loss of each day is settled in cash. This daily settlement distinguishes futures from forwards, where settlement occurs only at maturity.

• Standardised contract specifications simplify price discovery.
• Daily settlement reduces credit exposure.

Futures contracts are characterised by four mandatory features: (i) a defined contract size (e.g., 10 quintals of wheat), (ii) a tick size which is the minimum price movement, (iii) a fixed expiry cycle (monthly, weekly or quarterly), and (iv) a cash‑settlement or physical delivery option as prescribed by the exchange.

The contract size determines the monetary exposure of a single contract. For instance, a MCX gold futures contract of 1 kg means a price change of ₹100 per gram translates to a ₹10,000 profit or loss per contract.

Exam questions often ask you to compute the monetary impact of a price move using the contract size. A common trap is to forget the tick value or to mix up the unit of measurement (grams vs kilograms). Always read the contract specifications sheet before attempting calculations.

Each commodity listed on MCX or NCDEX has a detailed specification sheet. The sheet lists the lot size, tick size, minimum price fluctuation, contract months, and the settlement type (physical or cash). For Indian learners, the lot size is expressed in metric units such as kilograms, tonnes or liters, which aligns with the underlying physical market.

Understanding the specification is vital for margin calculation. The initial margin is a percentage of the contract value, set by the exchange, and varies with volatility. The maintenance margin is the lower threshold that triggers a margin call if the account balance falls below it.

In the exam, you may be given a contract specification and asked to compute the required margin or the monetary effect of a one‑tick move. Keep the units consistent – convert tonnes to kilograms if needed before multiplying.

The primary participants are hedgers, speculators and arbitrageurs. Hedgers – such as farmers, manufacturers or exporters – use futures to lock in prices and protect against adverse price movements. Speculators aim solely for profit by taking directional bets, while arbitrageurs exploit price differentials between related markets.

In the Indian context, the Securities and Exchange Board of India (SEBI) requires every participant to be a registered client of a broker and to maintain a margin account. Distributors of commodity‑linked products must verify the client’s risk profile before recommending futures.

Exam questions may present a scenario and ask which participant type is most appropriate. The key is to match the motive: risk mitigation = hedger; profit‑seeking = speculator; price‑gap exploitation = arbitrageur.

Mark‑to‑market (MTM) is the daily process where the exchange compares the previous day's settlement price with the current day's price. The difference is settled in cash through the trader’s margin account. A positive MTM adds funds (profit), while a negative MTM deducts funds (loss).

If the margin balance falls below the maintenance margin, the broker issues a margin call, and the trader must top up the account immediately. Failure to meet the call can result in the position being liquidated by the exchange.

For the exam, you may be asked to calculate the amount of cash transferred on a given day or to identify the point at which a margin call is triggered. Remember the formula: Variation Margin = (F_t – F_{t-1}) × Contract Size × Number of Contracts.

Initial margin is the upfront collateral required to open a futures position. It is calculated as a percentage of the contract value, typically ranging from 5% to 15% for commodities, depending on volatility. Maintenance margin is lower; if the account balance drops to this level, a margin call is triggered.

Risk management tools include stop‑loss orders, position limits and daily exposure caps set by the exchange. SEBI mandates that brokers enforce these limits to protect retail investors.

In the exam, you may need to compute the margin requirement for a given contract size and price. Always use the percentage provided in the question and keep the units consistent – contract value = Futures price × Contract size.