A standardised promise

A futures contract is a standardised promise to buy or sell something on a later date, at a price agreed today. You usually close the promise before that date. This chapter explains what is standardised, why the contract exists, and how it differs from simply owning the shares.

What is fixed so strangers can trade

A share trade is already standardised. A futures trade standardises a further set of terms so that you do not negotiate them with the other side. The exchange specifies the underlying, the quantity in one lot, the expiry dates, how the daily price is settled, and what happens if the underlying is split or pays a dividend. Because the terms match, you can exit by trading with anyone, not only with the person who took the other side this morning. The clearing corporation becomes the counterparty, which is why you are not spending the day wondering whether a stranger will keep a private promise.

The lot size is the smallest promise. If the lot is 500 shares and the futures price is ₹800, one lot is a promise on ₹4,00,000 of stock. You do not pay ₹4,00,000 today. You post a margin, discussed in the next chapter. The exposure is still ₹4,00,000. Forgetting the lot and remembering only the margin is the central mistake in this market.

Why the futures price is not today’s share price

The futures price is the price of the later delivery, not a second opinion on this afternoon’s share price. In a simple case it sits near the share price plus the cost of carrying the shares to expiry — interest you could have earned, minus dividends you will not receive because you hold the future and not the shares. If the future drifts far from that relationship, traders who can hold both sides step in, and the gap narrows. It does not have to be zero before expiry. At expiry, the contract is settled against the underlying price under the exchange’s rule, so the gap closes by construction.

You will see the future above the spot price in some months and below it in others. Below the spot price does not mean the market ‘expects a fall’ in any simple sense. Dividends, short-term interest, and demand to hedge can all pull the future under the spot price. Read the basis as a number you can compute, not as a mood.

You can close it without meeting a truck

Most futures are closed by an opposite trade before expiry. Bought one lot, sell one lot, and the promise is gone. What remains is the cash difference, already largely realised through daily mark-to-market. If you hold to expiry, settlement follows the contract specification: many equity futures in India settle in cash against a settlement price, so you still never collect the shares unless you separately buy them. Check the contract specification for the product you trade rather than assuming every future behaves like a textbook commodity delivery.

Who is on the other side, in purpose if not in name

A hedger already has the risk and wants to pass it on. A farmer, a jeweller, an importer, or a fund holding a portfolio may sell or buy futures to offset a move they do not want. A speculator does not have the underlying risk and takes the futures risk on purpose, hoping to earn the difference. Both meet in the same order book. The exchange does not label them. You should label yourself. If you are the speculator, your loss is not a hedge that ‘went wrong’. It is the position doing what you asked it to do.

What to remember

• A future is a standardised, exchange-cleared promise. The lot size is the real exposure.
• You post margin. You do not pay the full contract value up front, and you are still exposed to it.
• The futures price differs from the spot price by carry, dividends, and demand. It converges at expiry.
• Closing the contract is an opposite trade. Holding to expiry follows that product’s settlement rule.
• Decide whether you are offsetting a risk you already have, or taking a new one.