Key Futures Market Terminologies

In the previous module, we introduced the concept of a futures contract. Now, it's time to solidify your grasp on the subject by exploring the core terminology used in the futures market. These terms form the foundation for understanding how futures trading works on platforms like m.Stock. 

Futures Contract 

A futures contract is a standardised legal commitment to either buy or sell a particular underlying asset at a future date, known as the expiry, at a price agreed upon in advance. This structure is commonly used for hedging and speculation in both global and Indian financial markets. In India, such contracts are traded on exchanges like NSE, BSE, and MCX, all of which are accessible via m.Stock. 

Expiry Date 

The expiry date is the day on which the futures contract must be settled. On this date, both parties are obligated to complete the transaction as per the contract terms. This means the buyer must take delivery of the asset, and the seller must provide it. 

In India, futures contracts on NSE and BSE usually expire on the last Thursday of the expiry month. If that Thursday happens to be a holiday, the settlement occurs on the trading day immediately preceding it. 

Futures Price (Sometimes Called Strike Price) 

The futures price refers to the pre-agreed rate at which the underlying asset will be traded upon contract expiry. 

For commodity futures, this price is typically calculated by adding the current market price (spot price) and the cost of carry, which may include expenses like storage, insurance, and interest. For financial instruments such as indices or equities, the cost of carry is determined differently but follows the same principle. 

Spot Price 

The spot price is the prevailing market rate at which an asset can be immediately bought or sold. Although geographic variations exist, global integration and market efficiency ensure that spot prices for most assets remain consistent across markets, after accounting for transaction costs. 

Lot Size 

A lot denotes a fixed quantity of the asset being traded in futures. Due to standardisation, contracts can only be bought or sold in specific lot sizes set by the exchange. 

For example, one lot of Tata Consultancy Services (TCS) futures equals 150 shares. If you trade one TCS futures contract, you’re committing to buying or selling the full lot, unless you exit the position before expiry. This ensures liquidity and ease of settlement on platforms like m.Stock. 

Futures Margin 

In futures trading, investors are not required to pay the full contract value upfront. Instead, they need to maintain a margin, which is a small percentage of the total contract value. This acts as a good-faith deposit and ensures the financial security of the trade. 

For instance, if a NIFTY 50 futures contract has a notional value of ₹10,00,000 and the margin requirement is 10%, you only need to deposit ₹1,00,000. This leverage allows you to gain larger market exposure with limited capital—one of the strategic advantages of using m.Stock. 

Mark-to-Market (MTM) 

MTM is a daily adjustment process that reflects the current market value of open futures positions. It ensures that unrealized gains and losses are settled each trading day based on the difference between today’s and yesterday’s settlement prices. 

This real-time accounting system provides traders with accurate profit-and-loss visibility. If the margin balance falls below the required threshold due to MTM losses, traders may receive a margin call from their broker and need to replenish their account. 

Underlying 

The underlying is the actual asset on which the futures contract is based. It could be an equity, an index, or even a commodity. For example: 

1. For equity futures on TCS, the underlying is TCS shares. 

2. For index futures of NIFTY 50, the underlying is the entire NIFTY 50 index. 

3. For commodity futures like crude oil, the underlying is the commodity itself. 

Points to Remember 

• The expiry date marks the final day to fulfill the futures contract. 

• Lot sizes are predefined by exchanges and differ across assets. 

• The margin is the upfront deposit required to trade futures via platforms like m.Stock.