Futures
Future are form of derivatives trading in which two parties enter into a contract where they agree to buy/sell an asset at an agreed price, with agreed quality (commodities based derivatives), quantity/lot size on an agreed future date (expiry date). It is an obligation or legally binding agreement that is settled on the expiry date with the physical delivery of the underlying asset or cash.
Futures are exchange traded contracts and are therefore regulated. In India, different exchanges including NSE and BSE regulate future contracts. For example,on NSE, the future contracts are available with around 139 stocks and Nifty and BankNifty indexes as underlying assets. For how exchanges decide which stocks are part of Future and Options trading, please refer this post by StoxFactor.
Future trading provides the leverage advantage i.e. one can buy larger quantity by paying only a fraction of cost, this is called Margin money. In the below example, the future contract of ICICI Bank has the lot size of 1375, the spot price for August contract is Rs 361.75. If one had to buy same number of stocks in cash, he would have to pay 1375 * 361.75 = Rs. 497406 approx. However, for future contract one has to pay just the margin money that is Rs.166,322 approx.
Key Future Concepts
Lot Size - Total number of underlying assets that are included in one contract
Open Price - Price at which the first transaction of the given day happened.
High Price - The maximum price at which the contract traded on the day
Low Price - Lowest price reached during the trading day
Prev. Close - The price at which the contract settled at the end of the previous day
Last Price - The latest traded price (Spot Price) of the contract during the trading session
Volume - Total number of contracts that have traded during the trading day/session
Contract - Explains the type of contact, the underlying asset and the expiry date of the contract
Open Interest - Total number of contracts in circulation
VWAP - Volume Weighted Average Price, is the ratio of the value traded to total volume traded over a particular time window(usually one day)
Cost of Carry - It is the price one pays for holding a position. In the derivatives market, it includes interest expenses on margin accounts, which is the cost incurred on an underlying security or index until the expiry of the futures contract.
Future Price = Spot Price + Cost of Carry
In the example below, if cost of carry is applied at 7% annual interest, then for ICICI Bank future trading at 360, the holding cost for one month will 360*0.07*30/365 and future price will be
Future Price = 360 + 60*0.07*30/365
Similar to stock future contracts there are Index Futures like Nifty and BankNifty future contracts that are traded on exchanges in India.
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