Futures Contract – Meaning & Standardized Features

Futures are just Forwards that went to a strict school.

1. Definition

"A Futures Contract is a standardized agreement traded on an Exchange to buy or sell an asset at a certain date in future at a specific price."

• Key Difference: It is not between you and me. It is between you and the Exchange.

2. Salient Features (The "Standardization")

Unlike Forwards where you can trade 123 kg, Futures have fixed rules:

1. Contract Size (Lot Size): You can only buy in multiples. (e.g., 1 Lot of Nifty = 50 units). You cannot buy 1 share.
2. Expiry Date: Fixed by Exchange (e.g., Last Thursday of the month). You cannot choose your own date.
3. Delivery: Standardized quality (e.g., 24 Carat Gold only).
4. Margin: You must pay Initial Margin to trade.

3. Diagram: Forward vs Future

4. Exam Notes: Writing the Answer

Question: "Define Futures Contract. How does it differ from Forwards?" (10 Marks)

Answering Strategy:

1. Definition: "Standardized, Exchange-Traded...".
2. Features: Focus on "Standardization" (Lot size, Expiry).
3. Safety: Explain the role of the Clearing House as the guarantor.

Summary

• Liquidity: Because everyone trades the same contract (e.g., near-month Nifty), liquidity is huge.
• Safety: The Exchange stands in the middle.

Quiz Time! 🎯