The Hindu Business Line : Futures guide

Futures: A futures contract is an agreement between two parties to buy or sell an underlying asset at a certain time in the future at a certain price. It has standardised date and month of delivery, quantity and price.

Spot Price: The price at which the underlying asset trades in the spot or cash market.

Futures price: The price at which the futures contract trades in the futures market.

Cost of carry: The difference between futures prices and spot prices is equated by the cost of carry. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset.

Open interest: Open Interest is the number of open contracts in a given maturity contract. A full open interest consists of a long position in combination with short position. It becomes an open contract when it is not closed by a counter position or when it has not expired. One unit of open interest represents always two parties, one buyer (long) and one seller (short).

Contract Value: In the case of Nifty contracts, the value of the contract is equal to the index value multiplied by 200, which is the minimum number of contracts that must be traded. In the case of the Sensex futures, the value of the contract is equal to the index value multiplied by 50, which is the minimum number of contracts that must be traded.

Expiration: The expiration date for all contracts is the last Thursday of the respective month. Three series of futures contracts are available and have one-month, two-months and three-months expiry cycles. On the Friday following the last Thursday, a new contract having a three-month expiry is introduced for trading.

Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin.

Mark-to-market: In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investor's gain or loss depending upon the futures closing price. This is called mark - to - market.

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