Futures Contracts: Meaning, Settlement & Examples

What Is a Futures Contract? The Core Concept

At its most fundamental level, a futures contract is a promise. Two parties agree today on a price at which they will exchange a specific asset on a specific date in the future. The buyer of the futures contract is said to be "long" - they have agreed to purchase the underlying asset at the contract price. The seller is "short" - they have agreed to deliver or settle it at that price. Because the price is fixed at the outset, both parties are protected from (and simultaneously locked out of) any price movement between the agreement date and the settlement date.

This concept is ancient. Historians trace organised futures-style contracts back to 17th-century Japan, where rice merchants on the Dojima Rice Exchange in Osaka traded standardised forward contracts on future rice deliveries. The idea was straightforward: a rice farmer wanted certainty about the price he would receive at harvest; a merchant wanted certainty about the cost of rice he would need months later. By agreeing on a price today, both parties eliminated their uncertainty - even if it meant one of them would end up having "overpaid" or "undersold" relative to the spot price at settlement.

Modern futures contracts work on the same principle, but with critical enhancements that were developed by organised exchanges over the 19th and 20th centuries. The most important of these enhancements are standardisation, central clearing, and daily mark-to-market settlement.

Standardisation means every detail of the contract - the quantity of the underlying asset (called the "lot size"), the quality or specification of that asset, the settlement date, and the settlement method - is fixed by the exchange, not negotiated between individual buyers and sellers. On NSE, for example, the lot size for Nifty 50 futures is currently 25 units of the index. You cannot negotiate a lot size of 30 or 20; it is 25. This standardisation creates enormous liquidity because every market participant is trading identical contracts.

Central clearing means a regulated entity - in India, this is NSE Clearing Limited (NCL) or the Indian Clearing Corporation Limited (ICCL) for BSE - interposes itself between the buyer and seller. Once a trade is executed, the clearing corporation becomes the buyer to every seller and the seller to every buyer. This eliminates counterparty risk: you do not need to worry about whether the person on the other side of your trade will honour the contract, because the clearing corporation guarantees settlement.

Daily mark-to-market (MTM) settlement means that gains and losses are not accumulated and settled only at contract expiry. Instead, at the end of every trading day, your position is revalued at the day's settlement price, and the resulting profit or loss is immediately credited to or debited from your trading account. This daily cash flow mechanism prevents the accumulation of large unpaid obligations and is central to why futures markets remain financially stable even during periods of extreme volatility.

Together, these three features - standardisation, central clearing, and daily MTM - distinguish exchange-traded futures contracts from over-the-counter (OTC) forward contracts, which are privately negotiated, not centrally cleared, and often settled only at maturity. Both instruments serve similar economic purposes, but they carry very different risk profiles.

The Underlying Assets: What Can You Trade Futures On in India?

One of the strengths of the futures market is its versatility. A futures contract can - in principle - be written on almost any asset whose price is uncertain and observable. In India, the regulatory framework, administered by SEBI for securities and equity derivatives, and jointly by SEBI and the relevant commodity regulator (now merged under SEBI since 2015) for commodities, has approved several broad categories.

Equity Index Futures: These are among the most actively traded derivatives in India. The underlying is a stock market index - most prominently the Nifty 50 on NSE and the Sensex on BSE. Because you cannot physically deliver an "index," these contracts are always cash-settled. The Nifty 50 futures market is one of the highest-volume index futures markets in the world. Other index futures available on NSE include Nifty Bank (Bank Nifty), Nifty IT, Nifty Midcap Select, and several others. Each has its own lot size and margin requirement.

Single Stock Futures (SSF): These contracts have a specific listed company's shares as the underlying asset. SEBI periodically reviews and updates the list of stocks eligible for futures and options trading, based on criteria such as market capitalisation, liquidity, and trading history. SSFs are physically settled in India - a significant regulatory change that SEBI introduced in October 2019, when it mandated physical delivery for stock derivatives (as opposed to cash settlement, which was the earlier practice). This has important implications for traders holding positions close to expiry, as they may need to deliver or take delivery of actual shares.

Currency Futures: These contracts are based on exchange rates - primarily USD/INR, EUR/INR, GBP/INR, and JPY/INR. They trade on NSE, BSE, and MSE. Currency futures are useful for importers and exporters seeking to hedge foreign exchange risk, as well as for traders with a view on exchange rate movements. The Reserve Bank of India (RBI) has guidelines on who may participate in currency derivatives markets and for what purposes, particularly for larger position sizes.

Commodity Futures: MCX is the dominant exchange for commodity futures in India, covering energy products (crude oil, natural gas), precious metals (gold, silver), base metals (copper, aluminium, zinc, lead, nickel), and agricultural commodities. NCDEX focuses primarily on agricultural commodities such as chana (chickpea), soybean, mustard seed, and castor seed. Commodity futures were historically the original use case for this type of contract - allowing farmers, processors, and traders to manage price risk in physical goods.

Interest Rate Futures: NSE offers futures on government securities (G-secs) and on MIBOR-linked instruments. These are primarily used by banks, insurance companies, and large institutional investors to manage interest rate risk.

Understanding which type of futures contract you are considering is important, not just because the underlying dynamics differ, but because the regulatory treatment, margin requirements, tax implications (refer to the latest Finance Act for current rates), and settlement methods can vary significantly across these categories.

Key Terminology Every Futures Trader Must Know

Like any specialised field, futures trading has its own vocabulary. Mastering this terminology is essential before you place your first trade, because misunderstanding even one term can lead to costly mistakes.

Spot Price vs. Futures Price: The spot price is the current market price of the underlying asset for immediate delivery. The futures price is the price agreed in the contract for future delivery. The difference between the two is called the "basis."

Basis = Futures Price − Spot Price

In most markets, futures prices are slightly higher than spot prices when markets are in a state called "contango" - this occurs because of the cost of carrying the asset forward in time (storage costs, financing costs, insurance). In "backwardation," futures prices are below spot prices, which can occur when there is strong immediate demand for the physical asset or when the market expects prices to fall.

Lot Size (Contract Size): The minimum quantity you can trade in a single futures contract. For Nifty 50 futures, the lot size is 25 index units. For a single stock futures contract, the lot size varies by stock and is set by SEBI/NSE/BSE. You cannot trade fractions of a lot.

Expiry Date: The date on which the futures contract matures and is settled. On NSE and BSE, equity and index futures have monthly expiry cycles - the last Thursday of each calendar month (or the preceding Wednesday if Thursday is a holiday). At any given time, contracts for three consecutive months are available: the near month, the middle month, and the far month. The near-month contract is always the most liquid.

Rollover: When a trader wishes to maintain a futures position beyond the expiry of the current contract, they must "roll over" - closing the expiring contract and opening an equivalent position in the next month's contract. Rollover activity is heaviest in the last week before expiry.

Open Interest: The total number of outstanding (unsettled) futures contracts at any point in time. Open interest is a measure of market activity and liquidity. Rising open interest alongside rising prices is generally interpreted as a bullish signal; rising open interest with falling prices may indicate building bearish momentum.

Margin: To enter a futures position, you do not pay the full contract value upfront. Instead, you deposit a fraction of the contract value as "margin" with your broker, who passes it to the clearing corporation. There are two types of margin: Initial Margin (the upfront deposit required to open a position) and Mark-to-Market Margin (the daily cash settlement of gains and losses). If your MTM losses erode your margin below a threshold called the "maintenance margin," your broker will issue a margin call, requiring you to top up your account.

Leverage: Because you control a large notional contract value with a relatively small margin deposit, futures provide significant leverage. This magnifies both potential profits and potential losses. If the initial margin is 10% of contract value, you are effectively operating at 10x leverage.

Settlement Price: The official price used at the end of each trading day (and at final expiry) to calculate MTM obligations. Exchanges calculate this as a volume-weighted average price (VWAP) of trades in the last 30 minutes of the trading session, or use a reference price methodology for final settlement.

Contango and Backwardation: As noted above, contango is the normal condition where futures > spot, and backwardation is the reverse. Understanding this helps traders interpret futures pricing and plan rollovers more efficiently.

Circuit Breaker / Price Band: Exchanges impose daily price movement limits on futures contracts to prevent runaway volatility. If a contract moves by a specified percentage, trading may be halted temporarily or the circuit breaker may be triggered.

How Futures Pricing Works: The Cost-of-Carry Model

Understanding how futures are priced - and why the futures price is rarely identical to the spot price - is critical for anyone participating in these markets. The theoretical framework used to price futures is called the Cost-of-Carry model.

The intuition is simple: if you could buy an asset in the spot market today and simultaneously sell a futures contract for delivery in three months, you should be able to lock in a risk-free profit if the futures price is "mispriced" relative to the spot price. In an efficient market, arbitrageurs ensure this mispricing does not persist. The result is a precise mathematical relationship between the spot price and the fair value of the futures price.

For a financial asset (like an equity index) with no dividend or yield: Fair Futures Price = Spot Price × e^(r × T)

Or in the simpler discrete compounding form: Fair Futures Price = Spot Price × (1 + r)^T

Where r is the risk-free interest rate and T is the time to expiry expressed as a fraction of a year.

For dividend-paying stocks or indices, the formula adjusts for dividends expected to be paid during the life of the contract: Fair Futures Price = (Spot Price − Present Value of Dividends) × (1 + r)^T

For commodity futures, the formula includes storage costs and convenience yields: Fair Futures Price = Spot Price × (1 + r + Storage Cost − Convenience Yield)^T

In practice, the actual traded futures price may deviate from the theoretical fair value due to transaction costs, short-selling restrictions, differing borrowing and lending rates, and supply-demand imbalances. These deviations create opportunities for arbitrageurs - typically institutions - to trade the "cash-futures spread" and profit from mispricings, in the process pushing prices back toward fair value.

For retail traders, the most practical takeaway from cost-of-carry theory is understanding "futures premium" and "futures discount." Near expiry, as T approaches zero, the futures price converges toward the spot price - a phenomenon called price convergence. If you buy a futures contract at a large premium to spot, you are effectively "paying" that premium as a cost, which will erode as time passes even if the underlying price does not move. Conversely, if you short a futures contract trading at a large premium, time is working in your favour as that premium decays.

In the Indian equity derivatives context, near-month Nifty 50 futures typically trade at a premium of anywhere from a few points to 50-100 points above the Nifty 50 spot index, depending on interest rates, time to expiry, and near-term dividend expectations from Nifty constituent stocks. This premium can occasionally flip to a discount (backwardation) around large dividend payment periods or when there is significant short-selling pressure.

For commodity futures on MCX, the dynamics are somewhat different. The cost of carry for gold futures, for example, includes storage costs and insurance, while crude oil futures are heavily influenced by global supply-demand dynamics, OPEC decisions, and INR/USD exchange rate movements - all of which can dominate the pure carry calculation.

Margin System in Indian Futures Markets: SPAN and Exposure Margins

The margin system is the financial backbone of the futures market. It is designed to ensure that all participants can meet their obligations, and it is worth understanding in detail because your margin requirement directly determines how much capital you need to trade and how much leverage you are using.

In India, NSE and BSE use a risk-based margining system called SPAN (Standard Portfolio Analysis of Risk), which was developed by the Chicago Mercantile Exchange and is used by exchanges worldwide. SPAN calculates the worst-case one-day loss that a portfolio of positions could suffer under a range of hypothetical market scenarios (typically 16 scenarios combining different levels of price movement and volatility changes). The initial margin required is set at a level sufficient to cover this worst-case scenario.

In addition to the SPAN margin, exchanges also collect an Exposure Margin (sometimes called the extreme loss margin or additional margin) which provides a further buffer against losses beyond what SPAN covers. The total initial margin is the sum of SPAN margin and Exposure Margin.

For Nifty 50 futures, the initial margin percentage has historically ranged roughly between 10% and 12% of the notional contract value, though this changes based on market volatility. SEBI mandates minimum margin requirements, and during periods of high volatility, exchanges may increase margins - this is called a "margin hike" and is common during sharp market corrections, election periods, or major global events.

Here is a simplified illustration. Suppose Nifty 50 is trading at 22,000 and the lot size is 25 units. The notional contract value is 22,000 × 25 = Rs. 5,50,000. If the initial margin requirement is 10%, you would need to deposit approximately Rs. 55,000 to hold one lot of Nifty futures. You are controlling a Rs. 5.5 lakh position with Rs. 55,000 - a leverage ratio of 10:1.

Mark-to-market (MTM) margin works as follows: at the end of each trading day, the clearing corporation calculates the difference between your entry price (or the previous day's settlement price) and today's settlement price. If you are long and prices have risen, this difference is credited to your account. If prices have fallen, the difference is debited. This happens automatically, and the cash flows are settled the next morning through the exchange's clearing mechanism.

If your account balance falls below the maintenance margin level (typically set at a percentage of the initial margin), your broker will issue a margin call, requiring you to deposit additional funds. If you fail to meet a margin call, your broker has the right to square off (close) your position to prevent further losses - and this can happen very quickly, sometimes within hours.

Peak Margin Reporting: SEBI introduced peak margin reporting rules (phased in from December 2020) which require brokers to report the peak margin used by clients during the day, and penalise for shortfalls. This effectively limits intraday leverage in futures trading to the prevailing exchange-mandated margins, reducing the ability of brokers to offer "exposure" beyond regulatory limits.

It is also worth noting that client margin funds are subject to strict segregation rules under SEBI regulations - brokers cannot use client margin money for their own purposes, and all margins must be collected upfront before trades are executed.

Settlement of Futures Contracts: Cash vs. Physical Delivery

How a futures contract is finally settled - what actually happens on expiry day - depends on the type of contract and the exchange rules. There are two broad settlement mechanisms: cash settlement and physical delivery.

Cash Settlement: In a cash-settled contract, no actual asset changes hands at expiry. Instead, the final profit or loss is calculated based on the difference between your entry price and the final settlement price, and this net amount is transferred between accounts. Equity index futures (like Nifty 50 and Bank Nifty futures on NSE) are always cash-settled, because there is no physical "Nifty 50" to deliver - it is an abstract mathematical index of 50 stock prices.

For cash-settled contracts, the final settlement price is typically based on the volume-weighted average of the underlying index or asset in the cash market during a specified window on expiry day (usually the last 30 minutes of trading). This is sometimes called the "expiry-day VWAP."

Physical Delivery for Single Stock Futures: As mentioned earlier, SEBI mandated physical delivery for single stock futures from October 2019. This means that if you hold a long futures position in a stock at expiry, you are obligated to receive delivery of actual shares - and you will need the full purchase amount in your trading account (not just the margin). Conversely, a short position holder must deliver actual shares, which means they need to hold those shares in their demat account.

This change was introduced to strengthen the link between futures and spot markets and to reduce speculative excess close to expiry. It has significant practical implications: traders who do not wish to give or receive delivery of shares must square off (close) their futures positions before expiry. Many brokers automatically square off physically-settled positions if clients have not done so by the prescribed cut-off time.

Commodity Futures Settlement: For commodity futures on MCX, both cash-settled and physically-delivered contracts exist. Gold and silver futures, for example, have a physical delivery option: buyers can take delivery of standard gold or silver bars at designated exchange-approved vaults, provided they have met the quality and quantity specifications. In practice, the majority of retail traders close out their positions before delivery, but large institutional participants and actual industry users (jewellers, manufacturers) do participate in physical delivery.

For agricultural commodity futures on NCDEX, physical delivery is more common and is an important part of the market's price discovery function for the farming community.

Early Closure (Squaring Off): In practice, the majority of futures positions - particularly those held by retail and speculative traders - are not held to expiry. Traders close their positions before the contract expires by executing an equal and opposite transaction: a long position is closed by selling an identical contract; a short position is closed by buying back the same contract. The net profit or loss at closure is the difference between the two transaction prices, adjusted for any MTM settlements already paid or received during the holding period.

Settlement Calendar: NSE equity and index futures expire on the last Thursday of each month. Commodity futures on MCX have product-specific expiry calendars - gold futures, for example, have different expiry dates than crude oil futures. Currency futures on NSE expire two working days before the last business day of the expiry month. Always check the specific expiry calendar for your contract type before trading.

Futures vs. Options: Understanding the Key Difference

A common source of confusion for new investors is the distinction between futures contracts and options contracts. Both are derivatives, both are traded on exchanges like NSE and BSE, and both have expiry dates. But they are fundamentally different instruments with very different risk profiles.

Obligation vs. Right: The most critical distinction is that a futures contract creates an obligation for both parties. The buyer must buy, and the seller must sell, at the agreed price on expiry (or at least accept the cash settlement equivalent). Neither party can walk away. An options contract, by contrast, gives the buyer the right but not the obligation to buy (call option) or sell (put option) the underlying at a specified price (the strike price) on or before expiry. The option buyer can simply choose not to exercise the option if it is not in their interest to do so.

Premium Payment: When you buy an options contract, you pay a premium upfront. This premium is the maximum amount you can lose as an options buyer - if the option expires worthless, you lose only the premium paid. When you enter a futures contract, you do not pay a premium. Instead, you deposit margin, and your position is marked to market daily. Your potential loss as a futures buyer or seller is theoretically unlimited (in practice, bounded by circuit breakers and margin calls).

Risk Profile: An options buyer has asymmetric risk - limited downside (the premium paid) and theoretically unlimited upside. An options seller has the reverse profile - limited upside (the premium received) and theoretically unlimited downside. A futures buyer or seller has symmetric risk - both profits and losses are theoretically unlimited.

Leverage: Both instruments offer leverage, but in different ways. Options leverage is expressed through the delta (a measure of how much the option price changes for a unit change in the underlying). Deep out-of-the-money options can offer extremely high notional leverage but will expire worthless most of the time. Futures offer consistent, direct leverage tied to the margin requirement.

Pricing Complexity: Futures pricing follows the relatively straightforward cost-of-carry model. Options pricing is more complex, incorporating factors such as the underlying price, strike price, time to expiry, implied volatility, interest rates, and dividends - captured in models like Black-Scholes or binomial trees.

Use Cases: Futures are typically preferred for straightforward directional bets ("I believe the Nifty will rise in the next month"), for hedging large equity portfolios against market declines, and for commodity price risk management. Options offer more nuanced strategies, including income generation (covered calls), downside protection (protective puts), and strategies that profit from volatility rather than just direction.

For Indian retail investors, it is important to understand that both futures and options in the F&O segment require specific segment activation with your broker, carry their own margin requirements, and are subject to SEBI regulations. Neither instrument should be approached without a thorough understanding of the mechanics and risks involved.

Uses of Futures: Hedging, Speculation, and Arbitrage

Futures contracts serve three primary economic purposes: hedging, speculation, and arbitrage. Each serves a different market participant with a different motivation, and all three are necessary for a healthy, efficient futures market.

Hedging: Hedging is the use of futures to reduce or eliminate price risk in an existing exposure. It is the original and most economically important use of futures markets.

Consider a portfolio manager who manages a large equity portfolio worth Rs. 5 crores, benchmarked against the Nifty 50. In the run-up to a major macroeconomic event (say, a Union Budget or a US Federal Reserve meeting), the manager is concerned about a short-term market correction but does not want to sell the equity portfolio (due to transaction costs, tax implications, and the belief in long-term value). The manager can short an appropriate number of Nifty 50 futures contracts to hedge the portfolio's market exposure. If the market falls, the short futures position generates profits that offset the portfolio's mark-to-market losses.

Similarly, an Indian company that imports crude oil is exposed to the risk of rising oil prices. By buying MCX crude oil futures, the company can lock in a purchase price for future deliveries, protecting itself from price spikes.

A farmer growing soybean can sell NCDEX soybean futures at current prices, locking in a revenue for the upcoming harvest even before the crop is ready. If prices fall by harvest time, the farmer's futures position generates a profit that compensates for the lower selling price in the spot market.

Speculation: Speculators take on price risk voluntarily, hoping to profit from price movements. They have no underlying position to hedge - they are simply trading on their view of where prices will go. Speculators are often criticised in popular discourse, but they play an essential role in futures markets: they provide liquidity (by being willing to take the other side of trades) and they improve price discovery (by incorporating information and views into prices).

A retail trader who believes the Nifty 50 will rise following a positive budget announcement might buy one lot of near-month Nifty futures. If the market rises as anticipated, the trader profits from the price difference. If the market falls, the trader incurs a loss - and because of leverage, this loss can be substantial.

Arbitrage: Arbitrageurs exploit price discrepancies between related markets or instruments. In the equity derivatives context, cash-futures arbitrage involves buying shares in the cash market and simultaneously selling the corresponding stock futures contract (or vice versa) when the futures price diverges significantly from the theoretical fair value. The arbitrageur locks in the spread and waits for convergence at expiry.

For example, if a stock is trading at Rs. 1,000 in the spot market and its one-month futures are priced at Rs. 1,020, but the theoretical fair value (based on cost of carry) suggests the futures should be Rs. 1,010, an arbitrageur might buy the stock at Rs. 1,000 and short the futures at Rs. 1,020 - locking in a Rs. 10 per share spread (minus transaction costs). At expiry, when futures and spot prices converge, the arbitrageur unwinds both positions for a near-risk-free profit.

This arbitrage activity is a crucial market mechanism: it ensures that futures prices stay close to their theoretical fair values, which in turn ensures that the hedging effectiveness of futures contracts remains reliable for hedgers.

Understanding which category you fall into as a market participant - and being honest with yourself about it - is the first step toward using futures responsibly and effectively.

Practical Aspects: How to Trade Futures on NSE Through a Broker

For retail investors in India, trading futures requires a few specific prerequisites and involves a clear process from account setup to trade execution and monitoring.

Account Requirements: To trade in the F&O segment, you need a trading account and a demat account with a SEBI-registered broker. The demat account is linked to your PAN and Aadhaar. Most brokers, including Flattrade, offer an integrated platform where equity, F&O, and commodity trading can be accessed from a single login. You will need to activate the F&O segment specifically - this involves completing a risk disclosure acknowledgement and, in some cases, a knowledge-assessment test, as SEBI has been progressively strengthening investor suitability requirements for derivatives trading.

Margin Availability: Before placing a futures order, ensure you have sufficient margin available in your trading account. The required margin varies by contract and changes with market volatility. Your broker's trading platform will typically display the margin required per lot before you confirm the order.

Order Types: Futures orders work similarly to cash market orders. You can place market orders (executed at the best available price immediately), limit orders (executed only at your specified price or better), and stop-loss orders (triggered when the price reaches a specified level, to limit losses). For futures traders, stop-loss orders are particularly important given the leverage involved.

Position Monitoring: Unlike cash market positions where you can simply hold and ignore short-term fluctuations, futures positions require active monitoring. You should track your MTM position and available margin throughout the trading day. Many brokers offer real-time margin utilisation displays and automatic alerts when margin falls below a threshold.

Rollover Decisions: If you wish to maintain a position beyond the current expiry, you need to manage the rollover process: closing the near-month contract before expiry and opening an equivalent position in the next-month contract. The cost or benefit of rolling over depends on the prevailing spread between the two contracts. Rollover is typically most active in the last week of the expiry month (the week before the last Thursday).

Tax Treatment: Profits and losses from futures trading have specific tax treatment under Indian income tax law. Broadly, futures trading profits are treated as business income (not capital gains) for most active traders, and are taxed at the applicable slab rates. However, tax treatment can be complex and varies based on frequency of trading, whether it is your primary source of income, and other factors. You should consult a qualified tax professional and refer to the latest Finance Act for the current rules, as these provisions are subject to change.

Securities Transaction Tax (STT): STT is applicable on futures transactions, though at different rates than for equity cash market transactions. The exact STT rate is specified in the Finance Act and is subject to revision in each Union Budget. STT is an important transaction cost that affects the net profitability of futures trading strategies.

Brokerage and Other Charges: In addition to STT, you will pay brokerage (which varies by broker and plan), exchange transaction charges, SEBI turnover fees, GST on brokerage and transaction charges, and stamp duty. These costs, though individually small as a percentage of notional value, can add up significantly for active traders.

Example

Key benefits

How it works

1. 1
   Identify the Underlying and Your Market View

   Decide which asset you want exposure to (e.g., Nifty 50, a specific stock, gold on MCX) and form a clear directional view - bullish (buy futures) or bearish (sell futures).

2. 2
   Select the Contract and Expiry

   Choose the specific futures contract: near-month, mid-month, or far-month. Near-month contracts are most liquid. Note the expiry date (last Thursday of the month for NSE equity and index futures).

3. 3
   Calculate Margin Required and Check Capital Availability

   Determine the initial margin required per lot for your chosen contract (available on the exchange website or your broker's platform) and confirm you have sufficient funds in your trading account.

4. 4
   Place Your Order

   Enter the order on your broker's trading platform - specify the contract, lot quantity, order type (market, limit, or stop-loss), and price. The order gets matched on the exchange and you receive a confirmation with your average execution price.

5. 5
   Monitor Daily MTM and Margin

   Every trading day, track the MTM profit or loss on your position and ensure your account maintains the required margin. Top up promptly if you receive a margin call to avoid forced liquidation.

6. 6
   Manage the Position: Hold, Rollover, or Close

   Decide whether to hold until expiry, roll over to the next contract month if you want to extend your position, or square off (take an equal and opposite trade) to lock in your profit or cut your loss before expiry.

7. 7
   Settlement at Expiry

   If held to expiry, cash-settled contracts (like index futures) settle at the official final settlement price. Physically-settled contracts (like most stock futures) result in actual delivery of shares - ensure your demat or trading account is prepared for this before expiry day.

Formula

Fair Futures Price = Spot Price × (1 + r)^T
where r = risk-free interest rate (annualised) and T = time to expiry as a fraction of one year.

Key takeaways

Frequently asked questions

Related terms