FUTURES

FUTURES

A futures is a contract for buying or selling a specific underlying, on a future date, at a price specified today, and entered into through a formal mechanism on an exchange. The buyer of a futures contract is under the obligation to buy the underlying asset at the specified date. The seller of the futures contract is under the obligation to sell the underlying asset at the expiration date.

For example, Let’s assume that you are a farmer and produces rice. Your annual production is 100kg of rice. The current market price is Rs 200 per kg. The first option available to you is you produce the rice and sell it at current prices. But given the price volatility the market price can fluctuate and be lower. The second option available is you could fix a price now lets say Rs 2000 by selling a future contracts that obligates you to sell 100 Kg of rice after the harvest at fixed price.

Example:

• FUTIDX NIFTY 29^th August 2019 is a futures contract on the nifty that expires on 29^th August 2019. The value of the future contact is Rs 10855.
• Now if a trader believes that nifty will rise, he can buy a lot (75 shares) of Nifty futures by putting a margin at a fraction of the contract cost. The other party will sell the future contract.
• On Expiry, the settlement date at which the future contract will be settled may be higher or lower than 10855. If it is higher, the trader who had bought the future contract would have made profits and a seller at that price would have made losses. If the settlement price is lower. Then situation is reversed.

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