Basics of Derivatives
Features of a Futures Contract
Now that we are clear with the concept and features of the Forward contract, let us discuss the features of Future contracts.
1. Contract size
The size of the contract depends upon the contract we are trading in. The futures transaction can be entered in accordance with the prescribed lot size and the participants can only trade in multiples of the lot size while dealing in the futures market
The quantity of wheat or rice in case of contract for agricultural commodity futures, or value of currency in case of currency futures, or the number of shares in case of equity futures, everything is already predefined in terms of basic size.
2. Trading Cycle
Equity Futures are traded in cycles of 3 months. At any point of time, one can take a position to buy or sell the underlying equity share or an index for the current month and the coming two months. For example, if currently it is the month of October, then an individual can choose to enter the contract to buy or sell the underlying asset in the month of October or November or December.
A trader can take either the near month, or the next month or the far month position while trading in futures contracts on the stock exchanges.
Similarly, in the currency futures segment, the contracts are traded in the cycles of 12 months. At any point in time one can take the position to buy or sell the underlying currency for the current month and the coming eleven months.
3. Expiry Date
Futures are traded with a specific time frame in mind such that there is an expiry or settlement date for each future contract. All the outstanding positions (long or short) are settled on this expiry date. In the equity futures segment, the expiry date is the last Thursday of the expiry month.
*Note: If that Thursday is a holiday, then the previous trading day is taken under consideration. Similarly, in the Currency futures segment, the expiry date is the last business day of the month. If 27th September 2018 is a Thursday, then the contract expiry date will be 27th September and if it is a Friday then the expiry will be on Thursday.
4. Settlement Date
In India, Equity and Equity index futures contract are cash settled and physically settled. So, on settlement date, the net payoff is determined and settlement is made accordingly through cash or physical delivery of assets takes place.
Also, in the commodity futures segment on MCX, the settlement nature of various commodities varies.
For example, the gold mini contracts on MCX are deliverables, so in case any of the counter party does not square off his/her position 5 days before the settlement day, then he/she may be entitled to give or take the delivery of the underlying asset. Copper Futures contracts are cash settled.