A futures contract is a legal agreement to buy or sell an asset at a predetermined price on a specific future date. It is standardized and traded on organized exchanges. Futures are mainly used for hedging risk or speculating on price movements of the underlying asset.
Key Features:
- Standardized contract: Quantity, quality, and delivery date are fixed by the exchange.
- Traded on exchanges: Like NSE (India), CME (US), etc.
- Mark-to-market: Daily profit/loss is adjusted in the trading account.
- Leverage: You pay only a margin, not the full value of the contract.
- Compulsory execution or rollover: You must square off or it is settled on expiry.
Example:
- Suppose you buy a NIFTY Futures contract at 22,000 for expiry on 27th June.
- If NIFTY goes to 22,500, you earn the profit (22,500 – 22,000).
- If it goes down to 21,700, you incur a loss (21,700 – 22,000).
Common Underlying Assets:
- Stock futures (e.g., Reliance, Infosys)
- Index futures (e.g., NIFTY, BankNIFTY)
- Commodity futures (e.g., Gold, Crude Oil)
- Currency futures (e.g., USD/INR)