Nifty Futures

A future contract is a standardized contract to buy or sell a particular commodity or financial instrument at a certain date in the future at a market determined price (the future price). Future contracts are traded on a future exchange. The future date is called the delivery date or final settlement date. The official price of the futures contract at the end of a day’s trading session on the exchange is called the settlement price for that business day.

A future contract gives the holder the obligation to make, or take, delivery under the terms of the contract. Both parties – namely, the buyer and the seller of a future contract – must fulfil the contract on the settlement date. The seller delivers the underlying asset to the buyer or, if it is a cash-settled future contract, cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset his/her position by either selling a long position or buying back (covering) a short position, effectively closing out the futures position and its contractual obligations.

The Origin

The origins of futures contract can be traced to ancient Greece. Aristotle tells the story of Thales, a poor philosopher from Miletus who developed a “financial device, which involves a principle of universal application.” Thales used his skill in forecasting and predicted that the olive harvest would be exceptionally good the next autumn. Confident in his prediction, he made agreements with local olive-press owners to deposit money with them for the guaranteed exclusive use of their olive presses when the harvest was ready. Thales could successfully negotiate low prices because on one knew whether the forthcoming harvest would be plentiful or poor and because the olive-press owners were willing to hedge against the possibility of a poor yield. At harvest time, when many presses were wanted all at once and of a sudden. He let them out at any rate he pleased, and made a large amount of money.

The first futures exchange market was the Dojima Rice Exchange, which came up in Japan in the 1730s to meet the needs of the Samurai who, being paid in rice and after a series of bad harvest, needed a stable conversion to coin. (Source – Encyclopaedia)

Understand Margin

To minimize credit risk to the exchange, traders must post a margin or a performance bond, typically 5%-20% of the contract’s value.

To minimize counterparty risk to traders, trades executed on regulated futures exchanges are guaranteed by a clearing house. Effectively, the clearing house becomes the buyer to each seller, and the seller to each buyer so that in the event of a counterparty default, the cleaner assumes the risk of loss. This enables traders to transact without performing due diligence on their counterparty.

 Futures Traders 

Futures traders are traditionally in one of two groups:

·         Hedgers, who have an interest in the underlying asses (which could include an intangible such as an index or interest rate) and are seeking to hedge out, namely insure against the risk of price changes; and

·         Speculators, or traders, who seek to make a profit by predicting market moves and opening a derivative (finance) contract related to the asses “on paper”, while they have no practical use or intent to actually take or make delivery of the underlying asset. In other words, the trader is seeking exposure to the asset in a long futures contract, or the opposite effect via a short futures contract.

Nifty Futures

In India, the National Stock Exchange (NSE) commenced trading in index futures on June 12, 2000. The index futures contracts are based on the popular market benchmark S&P CNX NIFTY index (National Index for Trading in Equity, or National Fifty). NSE defines the characteristics of the futures contracts, such as the underlying index, market lot, and the maturity date of the contract. The futures contracts are available for trading from introduction to their expiry date.

The Nifty

S&P CNX Nifty is a well diversified 50-stock index accounting for 23 sectors of the Indian economy. It is used for a variety of purposes, such as benchmarking fund portfolios, index-based derivatives and index funds. S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), a joint venture between NSE and CRISIL. IISL is India’s first specialised company focused upon the index as a core product. IISL have a consulting and licensing agreement with Standard & Poor’s (S&P), the world leaders in index services.

Advantage of Trading Nifty Futures

Nifty futures allow you to trade the “entire stock market” instead of individual securities. Index futures are highly liquid, are characterized by large intraday prise swings and are easy to trade, both on buying and short selling. The advice of many experts and books is to trade in liquid markets