FAQ's>> Index Futures

What is Sensex Future? What is NIFTY Future?
Sensex Future is a financial derivative product enabling one to buy or sell underlying Sensex on a future date at a price decidedly the market forces today. It is the first financial derivative product in India. On NSE, the similar type of index-based future is NIFTY Future.

What is the security name of an Index Future? What is Ticker symbol?
The security name used for Sensex Future is BSX. This security name is also known as ticker symbol. Hence the ticker symbol is BSX. The security name and ticker symbol used for NIFTY Future is NFUTIDX NIFTY or in brief, NIFTY.

What is the main utility of Sensex Future &NIFTY Future?
Sensex Future is useful primarily for hedging one's Sensex-based portfolios and also for expressing one's views on the market. Usefulness of NIFTY Future is also the same. That means, it is useful primarily for hedging one's Nifty-based portfolios and also for expressing ones views on the market.

What is the underlying for Sensex Futures? What is the underlying for NIFTY Futures?
The underlying for the Sensex Futures is the BSE Sensitive Index of 30 scrips, popularly called the SENSEX. The underlying for NIFTY Futures is NIFTY, which is an important stock index based on 50 selected stocks on NSE.

What is the contract multiplier for Index Futures Contracts on BSE and NSE?
For Sensex Future, the contract multiplier is 50 times the Sensex.The means that the Rupee notional value of a future contract would be 50 times the contracted value. In case of Nifty Future, upto 31st March 2005 the contract multiplier was 200 times the Nifty. With effect from 1st April 2005 the contract multiplier of Nifty Future has come down to 100. For example, for July Nifty Future, if contract price of Nifty Future is 2050, notional value of1 lot (i.e. 100) of Nifty Future is Rs.205000.This notional value is expressed in ‘Rupees'.

What is the trading for different derivatives products?
The trading timings for the Derivatives Segment of BSE are from9:30 a.m. to 3:30 p.m .The trading timings for NSE derivatives products are from 9:55 am to 3:30 p.m. The investors are advised to check the trading timings from time to time.

What is the maturity of the futures contract?
Regulations permit introduction of futures up to 12 months maturity. Initially, however, futures for the one-month, two months and three months maturity have been introduced. On9th June on BSE, the three futures for June, July and August 2000were started. These futures expired on 29th June, 27th July and31st August 2000 respectively. This is because the expiry date has been fixed as the last Thursday of the month for each contract. On the day after the expiry, a new future would come into existence. For example in the year 2005, on 29th July, Friday (i.e., on the day after the expiry of July Future on 28th July, Thursday) August Future would come into existence and this August Future will expire on 25th August, Thursday. After starting of August Future, one can contract for September and October Future also, at any point of time before expiry of the concerned Future. The expiry dates for various futures contraction NSE and BSE are the same.

What is the tick size for different Index Futures?
For Sensex Futures, the tick size is ‘0.1 point'. This means that the minimum price fluctuation in the value of a future can be only0.1. In Rupee terms, this translates to minimum price fluctuation of Rs. 5 (Tick size x Contract Multiplier = 0.1 x Rs. 50). For Nifty futures, tick size/price step is Rs 0.05 and here the condition of minimum price fluctuation is not applicable.

How is the final settlement price determined?
The closing value of Sensex in the cash market is taken as the final settlement price of the Sensex Futures contract on the last trading day of the contract for settlement purpose. In the cases of Nifty Futures contracts, the final settlement price is calculated on the basis of closing value of Nifty in the cash market as on the last trading day of the relevant contract.

What is margin money?
Margin money is like a security deposit or insurance against a possible future loss of value. It is required to pay upfront initial margin on daily basis. Margin money is required to be paid to the Exchange through the broker by the person who makes contract for Future Trading (either in Stock Future or in Index Future). Generally, such margin money ranges from 12% to 25%of the contract value. Such margin money is not the same for all time and the Stock Exchange from time to time increases or decreases the margin money depending on the need to do so, after considering the market volatility and some other factors. The aim of margin money is to minimize the risk of default by either counter party. The payment of margin ensures that the risk is limited to the previous day's price movement on each outstanding position.

Are there different types of Margins?
Yes, there are different types of margins like Initial Margin Variation Margin and Additional Margin.

What is the objective of Initial Margin?
The basic aim of Initial Margin is to cover the largest potential loss in one day. Both buyer and seller have to deposit margins. The Initial Margin is deposited before the opening of the positioning the Futures transaction. This margin is calculated by SPAN by considering the worst case scenario.

What is Variation or Mark-to-Market Margin?
All daily losses must be met by depositing of further collateral, known as variation margin, which is required by the close of business, the following day. Any profits on the contract are credited to the client's Variation Margin Account.

What are long/short positions?
In simple terms, long and short positions indicate whether one has a net over-bought position (long) or over-sold position (short).

Is there a theoretical way of pricing Index Future?
The theoretical way of pricing any Future is to factor in the current price and holding costs or cost of carry. In general, the Futures Price= Spot Price + Cost of Carry. Cost of carry is the sum of all costs incurred if a similar position is taken in cash market and carried to maturity of the futures contract less any revenue which may resulting this period. The costs typically include interest in case of financial futures. The revenue may be dividends in case of index futures. Apart from the theoretical value, the actual value may vary depending on demand and supply of the underlying at present and expectations about the future. In general, the Futures price is greater than the spot price. In special cases, when cost of carry is negative, the Futures price may be lower than Spot price.

What is the concept of Basis?
The difference between spot price and Future price is known as basis. Although the spot price and Future price generally move in line with each other, the basis is not constant. In some cases Future price may be less, though spot price is high or vise versa. Generally basis will decrease with time. And on expiry, the basis is zero and Futures price equals spot price.

What is Contango Market?
Under normal market conditions. Futures contracts are priced above the spot price. This is known as the Contango Market.

What are the profits and losses in case of a futures position?
The profits and losses would depend upon the difference between the price at which the position is opened and the price at which it is closed. Let us take some examples.

What happens to profit or loss due to daily settlement ?
In case the position is not closed the same day, the daily settlement would alter the cash flows depending on the settlement price fixed by the exchange every day. However the net total of all the flows every day would always be equal to the profit or loss calculated above. Profit or loss would only depend upon the opening and closing price of the position, irrespective of how the rates have moved in the intervening days. Let us take the illustration given in example 1 where a long position is opened at 6,250 and closed at6, 350 resulting in a profit of 100 points or Rs. 5,000. Let us assume that the position was closed on the fifth day from the day it was taken and look at the resultant cash flows.

Does the Initial Margin affect the above profit or loss?
The initial margin is only a security provided by the client through the clearing member to the exchange. It can be with drawn in full after the position is closed. Therefore it does not affect the above calculation of profit or loss.

What are other costs of trading?
There would be funding cost/transaction cost in providing the Security. This cost must be added to one's total transaction costs to arrive at the true picture. Other items in transaction costs would include brokerage, stamp duty (or cost charged by Depository Participant for transferring the security from one dematerialized (beneficiary) account to other dematerialized (beneficiary) account, etc.

What are the Price Quotations for Sense Futures and NIFTY Futures?
Sensex point is the price Quotation for Sensex Futures and in thecae of NIFTY Futures the stock index point of NIFTY is the price Quotation.

What is Last Trading Day?
It is the last Thursday of the contract month. If it is a holiday, the immediately preceding business day would be the last trading day. For all types of derivatives products on both the BSE and the NSE the last trading day is always the last Thursday of the contract month.

What is Expiration Day?
It is same as above.

How is Daily Settlement Price calculated?
Daily settlement price is the closing price of Futures Contract Price computed on the basis of weighted average of the trades of last 5 (five) minutes, or if the number of trades in the last 5minutes are less than 5, then on the basis of weighted average of the last 5 trades.

What is a Spread Position?
A Calendar spread is created by taking simultaneously two positions -1. A long position in a futures series expiring in any calendar month;2. A short position in the same futures as stated above (underSl. No. 1 ) but for a series expiring in any month other than1 above.Examples of Calendar Spreads

Long June Nifty Futures - Short July Nifty Futures