FUTURE - INTRODUCTION

Future: A Future is contract between two parties to buy or sell an underlying asset on a future date on a future price.

Future contract does not have its own value, its value is derived from the underlying assets, and assets may be the Stocks or Index.

A future contract is standardized n terms of quantity, quality and in terms of delivery etc.

The future contracts are traded in an organized exchange, where a large part of the process is regulated.

Quantity: in respect of stocks all futures are traded in a fixed quantity decided by exchange, depending upon its underlying assets spot price. The quantity in future is termed as “Lot Size”.

Expiry: Every future gets expired on the last Thursday of every month. At any point of time there are always three contracts available for trades called, Near (current Month future), Mid (Next month future), Far (Third month future).
On the expiry the contracts are automatically expired by the exchange, but at any point of time the investor can square off his/her position by taking the opposite position of the same future contract. In India 95% of future contracts are squared off.

Margin: Margin System in India was designed by JR Verma committee. To enter in a future contract every one is required to pay an Initial margin, decided by the exchange, depending upon the daily volatility of the respective stock.

And every investor is required to maintain a minimum margin at every point of time during the trading sessions.

Mark-to-Market: To avoid hefty losses and any discrepancies in settlement the every open position is monitored by the exchange by an automated system which calculates the required minimum margin as per the current prevailing price in the market, failing to which the positions automatically gets squared off by the exchange.

Generally Initial margin collected by the exchange is sufficient enough to cover the losses which can be incurred by any investor on any 99% of the days, excluding some exceptions.

Settlement:In future EOD MTM is run on daily basis and the contract are settled on T+1 day depending upon the pay-in or pay-out obligation, and so on the margin is calculated every day depending upon the previous day closing.

Terminologies:

In-the-Money: If any contract is being traded above its underlying spot price, its called In-the-Money contract (at premium).

At-the-Money: If any contract is being traded at the same as its underlying spot price, its called At-the-Money contact (at par).

Out-of-Money: If any contract is being traded below its underlying spot price, its called Out-of-Money contract (at discount).

Buying future: If you are bullish and expect the price to appreciate, you will be buying the future contract.

Selling Future: If you are Bearish and expect the price to depreciate, you will be selling the future contract.

Index Future: There are also some index futures which does have Index as an underlying assets instead of individual stocks ,e.g. NIFTY , CNXNIFTY , NIFTYBANK , NIFTYIT , NIFTYMIDCAP, etc.

Stock futures: There are approx 190 stock futures, which are having individual stocks as its underlying assets. E.g. INFOSYS, ICICIBANK, HDFCBANK, etc.