Futures Contract
A futures contract is a standardised agreement to exchange an underlying asset at a predetermined price on a specified future date. On NSE, equity futures are available on index underlyings such as Nifty 50 and Bank Nifty, as well as on individual stocks in the F&O segment.
A futures contract obligates both parties — the buyer and the seller — to honour the trade at the agreed price regardless of where the market trades on expiry. Because the obligation is binding on both sides, futures carry unlimited upside as well as unlimited downside risk, unlike options where the buyer's loss is capped at the premium paid.
On NSE, equity futures contracts historically expired on the last Thursday of every month. Contracts were available in three series — near month, mid month, and far month — allowing participants to choose their time horizon. The lot size differed by underlying; for example, Nifty 50 futures carried a lot size of 25 units and Bank Nifty futures carried 15 units before periodic SEBI-mandated revisions. Margin requirements were governed by the SPAN system, which estimated worst-case loss over a one-day horizon.
Futures are widely used for hedging an existing equity portfolio. An investor holding a large-cap portfolio could hedge broad market risk by taking an opposing position in Nifty futures for the duration of an anticipated volatile period. The hedge is imperfect if the portfolio does not perfectly replicate the index, introducing basis risk.
A common misconception is that futures are exclusively speculative instruments. In practice, institutional participants such as mutual funds, foreign portfolio investors, and proprietary desks used futures heavily for portfolio rebalancing, index arbitrage, and risk management. Retail participants who entered futures positions without adequate margin buffers faced forced liquidation during sharp intraday moves, a risk that is distinct from the underlying directional risk.
The cost of carry — the difference between the futures price and the spot price — reflects interest rates and dividends. A futures contract trading at a significant premium or discount to fair value has historically attracted arbitrageurs who simultaneously traded in the cash and futures segments to lock in the spread, a strategy known as cash-futures arbitrage.