Types of Futures – Stock Index, Currency, Interest Rate, Commodity

1. Introduction

A Futures Contract is a standardized agreement to buy or sell an asset at a future date. The most common way to classify futures is based on the Underlying Asset from which they derive their value. Broadly, the futures market is divided into Financial Futures and Commodity Futures.

2. Classification of Futures Contracts

In the modern financial market, the following are the major types of futures contracts:

A. Stock Index Futures

• Meaning: These are futures contracts where the underlying asset is a Stock Market Index (e.g., Nifty 50, Sensex, Bank Nifty).
• Purpose: They allow investors to bet on the direction of the entire market rather than a single company.
• Settlement: Since an Index is a mathematical number and not a physical asset, Index Futures are always Cash Settled.
• Example: Buying a "Nifty Futures" contract hoping the market goes up.

B. Individual Stock Futures (Single Stock Futures)

• Meaning: These are futures contracts on shares of individual companies (e.g., Reliance, TCS, HDFC Bank).
• Purpose: They provide leverage to traders who want to take a position in a specific company without paying the full share price.
• Physical Delivery: In India, stock futures are physically settled (shares are exchanged) upon expiry, though most traders square off before expiry.

C. Currency Futures (Forex Futures)

• Meaning: The underlying asset is a currency exchange rate (e.g., USD-INR, EUR-USD).
• Purpose: Used extensively by Exporters and Importers to hedge against the risk of currency fluctuation.
• Example: An exporter expecting to receive Dollars in 3 months can sell USD-INR futures today to lock in the rate.

D. Commodity Futures

• Meaning: The underlying asset is a physical commodity.
• Categories:
  1. Hard Commodities: Gold, Silver, Crude Oil, Copper.
  2. Soft Commodities: Wheat, Sugar, Cotton, Coffee.
• Purpose: Used by farmers and manufacturers to lock in prices of raw materials.

E. Interest Rate Futures (IRF)

• Meaning: The underlying asset is a debt instrument (like Government Bonds or Treasury Bills) dependent on interest rates.
• Purpose: Used by Banks and Insurance companies to protect their portfolios against changes in RBI interest rates.

3. Comparison of Key Types

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4. Exam Notes: Writing the Answer

Question: "Classify the various types of Futures Contracts available in the market." (10 Marks)

Answering Structure:

1. Introduction: Start with "Futures are classified based on the underlying..."
2. Points: Use the 5 headings above (Index, Stock, Currency, Commodity, IRF).
3. Explanation: For each point, write the Meaning and one Example.
4. Conclusion: "While Commodity futures are the oldest, Index Futures currently command the highest trading volume globally."

5. Quiz Time! 🎯

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