Futures

Indian Economy glossary

Also called: Futures contract · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT

Meaning

A futures contract is a standard agreement, traded on an exchange, to buy or sell a fixed quantity of an asset at a price agreed today, on a set future date. Both sides must honour it. Gains and losses are settled in cash every day, and margins back the trade.

Why it matters: futures let farmers, exporters and investors lock in a price today, so a later price move does not hurt them. Futures prices also show what the market expects prices to be in the future (price discovery).
Fair futures price (cost-of-carry formula): F = S × (1 + r × t)
S = spot price (today's price in the cash market)
r = interest rate per year
t = time to expiry, in years

Explanation

How a futures contract works

Derivative: a futures contract is a derivative. It has no value of its own. Its value comes from an underlying asset (the share, index, currency or commodity it is based on).
Example: a Nifty future rises and falls with the Nifty index.
Standardised: the exchange fixes the lot size (units in one contract), the expiry date and the settlement rules. Buyers and sellers cannot change these terms.
Clearing corporation: it stands between every buyer and every seller.
Each side deals with the clearing corporation, not with the other trader.
So neither side carries the other's counterparty risk (the risk that the other side does not honour the deal).
Obligation on both sides: the buyer must buy and the seller must sell. This is the key difference from an option.

Margins and mark-to-market (MTM)

Margin is a deposit that the trader keeps with the broker or clearing house as a safety cushion.
Initial margin is paid when the trade is opened.
Maintenance margin is the minimum balance that must stay in the account.
Mark-to-market (MTM): at the end of each day, the gain or loss is settled in cash at that day's closing price.
Losses cannot pile up unseen.
A weak trader is caught early.
So the risk of default is cut.
Margin call: if losses push the balance below the maintenance margin, the trader must add money at once.
Worked example (MTM):
A trader buys 1 lot of 75 units of index futures at 24,000.
Day 1 close is 24,100. Gain = 100 × 75 = ₹7,500. This is credited to the account.
Day 2 close is 23,900. Loss = 200 × 75 = ₹15,000. This is debited. If the margin falls below the maintenance level, a margin call follows.
Leverage: a small margin controls a much bigger contract. Profits grow faster, and so do losses.

Pricing: cost of carry and arbitrage

Why the futures price is usually above the spot price: a buyer of futures does not pay the full amount today, so the money can earn interest until expiry. The seller asks for that interest in the price.
Worked example (fair price):
S = ₹1,000, r = 6%, t = 3 months (0.25 years).
F = 1,000 × (1 + 0.06 × 0.25) = 1,000 × 1.015 = ₹1,015.
Cash-futures arbitrage (a nearly risk-free profit from a price gap between two markets):
The spot price is ₹1,000, the actual futures price is ₹1,030 and the fair price is ₹1,015.
Buy the share in the cash market, sell the futures and hold both till expiry. This locks in about ₹15 more than the cost of carry.
Many traders do this, so the gap closes and futures prices stay close to their fair value.

Uses: hedging and speculation

Hedging means taking an opposite position to reduce risk.
Farmer: sells futures before the harvest to lock in a price.
- Prices fall at harvest → the farmer gets less in the market.
- But the short futures position gains.
- The gain makes up for the lower sale price.
A hedge removes risk in both directions. If prices rise, the farmer gives up the extra gain.
Speculation means betting on price moves without owning the underlying asset. Leverage makes futures attractive for this.

In India

Start: index futures began trading in June 2000, as part of the capital-market reforms that began in the 1990s.
Exchanges: equity futures trade on NSE and BSE. Commodity futures trade on MCX (mostly metals and energy) and NCDEX (mostly farm produce).
Regulator: SEBI regulates both securities and commodity derivatives.
Commodity derivatives used to be regulated by the Forward Markets Commission (FMC), set up in 1953. The FMC merged into SEBI in 2015.
Scale: India is the world's largest derivatives market by number of contracts traded. Most of this volume is short-dated index options, not futures.
Retail losses in F&O (futures and options on stocks and indices):
FY22–FY24: 93% of individual F&O traders lost money. Total losses were over ₹1.8 lakh crore across the three years. [1]
FY25: about 91% of individual traders lost money. Net losses rose 41% to ₹1,05,603 crore, up from ₹74,812 crore in FY24. [2]
SEBI published new studies on FY25–FY26 in August 2026. [3]
SEBI circular of 1 October 2024 on equity index derivatives, which include index futures: [4]
The contract value is now set at ₹15–20 lakh, up from ₹5–10 lakh. Bigger contracts keep out small traders who cannot bear the risk. [4]
Each exchange may have only one weekly index expiry.
There is no calendar-spread margin benefit on expiry day. A calendar spread means holding positions in two expiries of the same contract, for example the near-month and next-month futures.
Position limits are now monitored during the day (intraday), not only at the close of trading. [5]
Budget 2024-25 raised STT (Securities Transaction Tax, a tax charged on each trade on the exchange) on F&O.
Farm futures suspension:
Since December 2021, futures trading has been suspended in seven farm commodities: wheat, non-basmati paddy, chana, mustard, soybean, crude palm oil and moong. The suspension has been extended.
The reason given was to curb food inflation and speculation.
In May 2026, SEBI issued a consultation paper on the phased introduction of physical settlement in select agricultural commodity derivatives. Physical settlement means the actual goods are delivered, not just the cash difference. [6]

Don't confuse with

Forward contract: a customised OTC (over-the-counter, meaning a private deal made without an exchange) contract. It has no daily MTM and no clearing corporation, so its counterparty risk is high. Futures are standardised, exchange-traded and settled daily, so their counterparty risk is low.
Option: it gives the buyer a right but not an obligation to buy (call) or sell (put), and the buyer pays a premium for this right. In a futures contract, both sides have an obligation, and no premium is paid.
Swap: an exchange of streams of cash flows over a period, for example fixed interest for floating interest. Swaps are mostly OTC. A futures contract is a single trade on one expiry date, made on an exchange.
Initial margin vs maintenance margin: initial margin is paid when the trade is opened. Maintenance margin is the minimum balance that must stay in the account. Falling below it triggers a margin call.

Prelims Hooks

Futures are exchange-traded, standardised and marked to market daily. Forwards are OTC and customised, and they carry counterparty risk.
Both the buyer and the seller of a futures contract have an obligation. Only an option buyer has a right without an obligation.
Cost of carry: F = S × (1 + r × t). With S = ₹1,000, r = 6% and t = 0.25, F = ₹1,015.
Index futures in India started in June 2000.
FMC (1953) merged into SEBI in 2015. Commodity futures exchanges are MCX and NCDEX.
Seven farm futures have been suspended since December 2021: wheat, non-basmati paddy, chana, mustard, soybean, crude palm oil and moong. Basmati rice and sugar are not on the list.

Mains Points

Hedging vs speculation:
Futures move price risk from farmers, exporters and investors to people willing to carry it. They also help price discovery and make markets deeper.
But about 9 in 10 retail F&O traders lose money every year [1][2]. So the market is serving speculation more than hedging.
SEBI has chosen to make entry harder (larger contracts, fewer expiries, intraday position checks) rather than ban products [4][5].
Household savings and investor protection:
Retail losses of over ₹1 lakh crore a year [2] move household savings to proprietary traders and algorithmic firms.
This money could have gone into long-term investment.
This links the topic to financial literacy and to the Economic Survey's warnings on the retail F&O boom.
Agricultural futures, inflation control vs market development:
The suspension of seven farm commodities since 2021 aims to curb food inflation and speculation.
But farmers and FPOs lose a tool to lock in prices and to see where prices are heading.
SEBI's 2026 consultation on physical settlement [6] points to a careful, step-by-step reopening.

Related concepts

Derivatives: forwards, futures, options, swaps and CDS