Before we proceed a recap, of the distinguishing characteristics of a futures contract would help:
- Futures are contracts to buy and sell a “standardized quantity” of a particular asset (known as the underlying) on a given ‘future’ date at a predetermined rate (the Futures Price). The standardised quantity is denoted by the lot size.
- Futures are always exchange traded.
- Futures contracts are net-settled (price difference paid/received in cash; no delivery of assets is involved).
- Futures come with an expiry date.
Stock Futures [E.g Infosys Futures]: In case of a Stock Futures, the underlying is an individual stock or share. In other words, stock futures are contract to buy or sell a specific lot of equity shares on a given ‘future’ date (contract expiry date) at a predetermined price (the futures price).
Commodity Futures [Eg. Gold Futures]: A Commodity futures is a contract to buy or sell a fixed quantity of a commodity like gold or copper on a a given ‘future’ date (contract expiry date) at a predetermined price (the futures price).
Currency Futures [E.g USDINR Future Contracts]. A currency futures also known as a Foreign Exchange (FX) Future is an agreement to buy or sell a specific currency (E.g USD) in exchange of another currency (E.g INR) at a future date and at a predetermined future price.
Interest Rate Futures [E.g NSE Bond Futures]: An Interest Rate Future is an agreement to buy or sell a specific interest bearing debt security at a future date and at a predetermined future price.
In India futures generally expire on the last Thursday of their respective contract months.
Let us assume that you want to trade in futures of Infosys [Stock Futures]. The following data is available:
Current Stock Price (Spot market): Rs 5000
Price in the futures market (near month): Rs 5010. [The difference between spot price and Futures Price is due to the cost of carry i,e Interest.]
Lot size: 125 shares
While in the spot market, you can deal in even one Infosys share, in the futures market you will have to trade the minimum lot size. In the present case, the lot size is 125 shares.
Note that the lot size is of 125 shares so your traded value is: 5010 x 125 = Rs. 626250.
300 x 125 = Rs. 37,500.