1 Introduction
How futures really work — standardised contracts, margin, daily settlement, basis and open interest — taught at concept level.
Educational purpose only
Concepts and history only — nothing here is a signal, recommendation, target or stop loss.
2 Why this matters
Futures are leveraged contracts where losses can exceed the margin deposited; this module explains the mechanics before risk ever enters.
3 Core concepts
5.1 What a futures contract is
A future is a standardised agreement to buy or sell an asset at a set price on a future date. Unlike options, the payoff is linear — you gain or lose rupee-for-rupee with the underlying.
5.2 Margin & leverage
You post margin (SPAN + exposure), a fraction of the contract value, which creates leverage. Leverage magnifies both gains and losses — losses can exceed the margin.
5.3 Mark-to-market
Futures are settled daily against the closing price; profits and losses hit your account each day, not only at exit.
5.4 Basis & cost of carry
The gap between futures and spot is the basis, driven by interest and time to expiry (cost of carry). It converges to zero at expiry.
5.5 Open interest & rollover
Open interest is the number of outstanding contracts — a gauge of participation. Near expiry, traders roll over positions to the next month.
5.6 Who uses futures
Hedgers (to offset risk), speculators (to take a view) and arbitrageurs (to exploit pricing gaps).
4 Visual explanation
A long futures payoff is a straight 45° line through the entry price — symmetric gains and losses, unlike the kinked option payoff.
Illustrative concept diagram.
5 Indian market examples
NIFTY futures
Index futures let participants take a view on the whole market with one contract.
Daily MTM
A position can be profitable at exit yet have caused daily cash debits along the way via mark-to-market.
Rollover data
Analysts watch rollover percentages near expiry as a participation gauge — context, not a signal.
6 Case study
Futures were central to making Indian markets more efficient by allowing hedging and price discovery. A classic study is how index futures let an investor hedge a portfolio's market risk without selling the underlying stocks.
Takeaway
Leverage cuts both ways. Daily mark-to-market means losses are realised continuously, not just at exit.
7 Interactive exercise
Quick check:
8 Common beginner mistakes
Underestimating leverage
A small adverse move can wipe out the margin and more.
Forgetting daily MTM
Losses are debited daily — you need cash to maintain the position.
Ignoring rollover costs
Rolling to the next month has a cost embedded in the basis.
9 Pro tips
Hedging vs. speculating
Know which one you're doing — they have opposite intents.
Watch the basis
The futures-spot gap carries information about carry and sentiment.
Respect margin calls
Running low on margin forces liquidation at the worst time.
10 Summary — key takeaways
- Futures are linear, leveraged contracts settled daily (MTM).
- Margin creates leverage; losses can exceed it.
- Basis = cost of carry, converging at expiry.
- Open interest gauges participation; positions roll near expiry.
11 Knowledge check
Answer all, then press Check answers.
12 Practical assignment
Study task (no money involved)
On any charting site, compare a stock's spot price with its current-month future. Note the basis (future minus spot). Write one sentence on whether the future trades at a premium or discount to spot. Study exercise only.
Educational Purpose Only · No Investment Advice
This lesson is for financial education and awareness only. It contains no buy/sell recommendations, target prices, stop losses or guaranteed returns. Instrument and company names are used purely as real-world illustrations. We are not SEBI registered investment advisers or research analysts. Consult a SEBI registered professional before any investment decision.