ATS - FAQ

Future Trading

1. What is Futures Trading?
Futures trading involves buying or selling a contract to deliver an asset at a predetermined price on a future date. It allows traders to speculate on price movements or hedge risks.
2. How does a Futures Contract work?
A futures contract obligates the buyer to purchase and the seller to deliver the underlying asset at a specific price and date. These contracts are standardized and traded on exchanges.
3. What are the key components of a Futures Contract?
Key elements include the contract size, expiration date, underlying asset, tick size (minimum price movement), and margin requirements.
4. How is Futures trading different from Stock trading?
In futures, you're trading contracts, not ownership. Futures require margin, have expiry dates, and can be shorted easily. Stocks offer ownership and typically involve full payment.
5. What are margins in Futures trading?
Margins are upfront deposits (usually 5–15% of the contract value) to enter a futures position. They act as collateral and are adjusted daily (MTM).
6. What is Mark-to-Market (MTM)?
MTM is the daily adjustment of a futures position’s value to reflect market prices. Profits/losses are settled daily in your trading account.
7. What are the types of margins in Futures trading?
Margins include Initial Margin, Maintenance Margin, and Exposure Margin. These ensure traders have sufficient funds to manage potential losses.
8. What is Open Interest in Futures?
Open interest represents the total number of outstanding futures contracts in the market. Rising OI often indicates strengthening trends.
9. What are the common underlying assets in Futures?
Futures contracts exist on equities (stock futures), indices (like Nifty), commodities (like gold), and currencies (like USDINR).
10. What is contract rollover in Futures?
Rollover involves closing a near-month contract and opening the next-month contract in the same asset to maintain your position beyond expiry.
11. What is the difference between Intraday and Positional Futures trading?
Intraday involves squaring off positions on the same day, while positional trading holds contracts for multiple days or until expiry.
12. How can Futures be used as a hedging tool?
Futures can be used as a hedging tool by taking an opposite position to an existing asset to offset potential losses. For example, investors holding stocks can sell index futures to protect against a market downturn. This helps lock in value and reduce the impact of adverse price movements.
13. How is profit or loss calculated in Futures?
Profit/Loss = (Selling Price – Buying Price) × Lot Size. It depends on whether the trader went long or short and the number of lots.
14. What is the role of a Clearing House in Futures?
The clearing house acts as an intermediary between buyer and seller, ensuring smooth settlement and managing counterparty risk.
15. What is the significance of the Futures expiry date?
The expiry date is the last day the contract is valid. Positions must be squared off or rolled over before expiry to avoid settlement.
16. How is Futures pricing determined?
Futures prices = Spot Price + Cost of Carry (includes interest rate, dividend yield, and time to expiry).
17. What are Basis and Basis Risk?
Basis = Spot Price – Futures Price. Basis risk arises when the basis moves unpredictably, affecting hedging outcomes.
18. Are Futures contracts physically settled?
Some are physically settled (e.g., stock futures in India), while others are cash-settled (like index futures) based on closing prices.
19. What are the risks in Futures trading?
Risks include high leverage, market volatility, margin calls, and potential for large losses if positions move against expectations.
20. Who are the main participants in the Futures market?
Participants include hedgers (reduce risk), speculators (profit from price moves), and arbitrageurs (exploit price differences).