Advantages of Futures – Liquidity & Low Counterparty Risk

Why is Nifty Futures the most traded contract in India?

1. Key Advantages

A. High Liquidity

• Millions of people trade the exact same contract (e.g., Near Month Nifty).
• Benefit: You can enter or exit a trade in milliseconds. In Forwards, you are stuck.

B. No Counterparty Risk

• Novation: The Clearing Corporation (NCL) guarantees every trade. You don't care who the other party is.

C. Low Transaction Cost

• Brokerage on Futures is very low (e.g., ₹20 per order).

D. Price Discovery

• Futures prices are visible to the whole world instantly, providing a fair price benchmark.

2. Diagram: The Safety Net

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3. Exam Notes: Writing the Answer

Question: "What are the advantages of Futures over Forwards?" (5 Marks)

Answering Strategy:

1. Liquidity: "Easy exit".
2. Credit Risk: "Eliminated by Clearing House".
3. Transparency: "Screen based trading".

Summary

• Democratization: Futures allow even small retail traders to participate in huge asset classes like Gold or Oil.

Quiz Time! 🎯

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