Long-Dated Futures
Futures contracts with expiry dates significantly further in the future than the near-month contract, typically the far-month contract in the three-contract NSE series (expiring two months after the current month), characterised by lower liquidity, wider bid-ask spreads, and pricing driven primarily by cost-of-carry models rather than active supply-demand matching.
In Indian equity futures markets, NSE lists three monthly expiry contracts simultaneously for index futures and stock futures: the near-month contract (expiring at the end of the current month), the middle-month contract (expiring at the end of the next month), and the far-month contract (expiring at the end of the month after next). The far-month contract is the longest-dated futures available in the Indian equity derivatives market and constitutes the primary instance of long-dated futures trading in this context.
The pricing of any futures contract relative to the underlying spot price is governed by the cost-of-carry model. Theoretically, the fair value of a futures contract equals the current spot price multiplied by the interest rate accrual for the period until expiration, minus any dividends expected during that period. For a far-month contract expiring two months away, the cost-of-carry adjustment is approximately two months of financing cost — at a risk-free rate of 6.5% per annum, this would be roughly 1.1% above the spot price, all else equal.
In practice, the far-month contracts trade at a small premium or discount to this theoretical fair value, depending on demand from different participant types. Hedgers using futures to replicate long equity exposure (buy futures, hold cash) prefer the near-month contract for liquidity but sometimes use the far month to avoid rolling costs if they have a view extending beyond the current month. Arbitrageurs who exploit mispricing between the spot and futures prices tend to concentrate in the near-month where bid-ask spreads are narrowest.
Liquidity is markedly lower in far-month contracts than in near-month contracts. On a typical trading day in Nifty futures, the near-month contract accounts for perhaps 70-80% of total Nifty futures volume, with the middle-month taking most of the remainder and the far-month accounting for a small fraction. This liquidity differential means that large orders in far-month contracts can move the price substantially, imposing significant market impact costs.
In commodity markets, long-dated futures play a more central role. Crude oil futures on MCX list multiple monthly contracts, with contracts up to six months forward. For commodity producers and consumers with long planning horizons — a refinery locking in crude oil costs for the next quarter, or a metal fabricator hedging copper input costs — the longer-dated contracts are essential hedging tools. The shape of the commodity futures curve (contango versus backwardation) across these longer tenors carries important information about current supply and demand conditions, storage costs, and market expectations.
The absence of equity futures with expiries beyond three months in India is a structural constraint for long-term institutional hedgers — a portfolio manager wanting to hedge equity exposure for six months must roll two successive futures contracts, incurring transaction costs and basis risk at each roll.