What Is a Futures Contract?
A futures contract is a standardized legal agreement to buy or sell an asset at a predetermined price on a specified future date. Traded on exchanges, these contracts typically involve commodities or financial instruments. Key features include:
- Daily Mark-to-Market Settlements: Unrealized gains/losses are settled in cash daily, reducing counterparty risk.
- Leverage: Futures allow control of large positions with relatively small capital.
- Point Value (Multiplier): Defines the monetary value of each price-point movement (e.g., ₹50 per point for Nifty 50 futures).
Example: Daily Settlement Process
Day 1:
- A trader shorts one E-mini Nifty 50 contract at 2,900 (point value = ₹50).
- Daily close: 2,890 (10-point drop).
- Unrealized Gain: 10 × ₹50 = ₹500 (credited to account).
Day 2:
- Settlement price rises to 2,950 (60-point increase).
- Unrealized Loss: 60 × ₹50 = ₹3,000 (debited from account).
Calculating Profit and Loss in Futures
Key Terms
| Term | Formula | Example |
|---|---|---|
| Current Contract Value | Current Price × Contract Size | $54 × 1,000 = $54,000 |
| Value per Tick | Tick Size × Contract Size | $0.01 × 1,000 = $10 |
| Profit/Loss per Contract | Current Price − Entry Price | $54 − $53.60 = $0.40 |
Step-by-Step Calculation
Determine Ticks Moved:
- ($0.40 profit ÷ $0.01 tick size) = 40 ticks
Total Monetary Move:
- (40 ticks × $10/tick) = $400 profit per contract
Aggregate P&L:
- Multiply by number of contracts held (e.g., 5 contracts = $2,000).
Long vs. Short Positions Payoff
- Long Futures: Profit when underlying price > entry price.
(Example: Buy at ₹1,000; profit above ₹1,000) - Short Futures: Profit when underlying price < entry price.
(Example: Sell at ₹1,000; profit below ₹1,000)
👉 Master futures trading strategies to optimize your portfolio.
FAQs
Q1: How is futures P&L different from stocks?
A1: Futures use mark-to-market daily settlements and leverage, while stocks realize P&L only upon sale.
Q2: What’s the role of tick size?
A2: Tick size standardizes minimal price movements (e.g., $0.01) to calculate precise dollar gains/losses.
Q3: Can losses exceed initial margin?
A3: Yes, due to leverage. Risk management tools like stop-loss orders are critical.
Q4: Why does point value matter?
A4: It converts price movements to monetary terms (e.g., ₹50/point for Nifty 50).
Q5: How are overnight positions handled?
A5: Daily settlements adjust account balances, but positions remain open until closed.
Advanced Considerations
Impact of Leverage: Amplifies both gains and losses.
- Example: 10:1 leverage turns a 5% move into a 50% P&L.
- Rolling Contracts: Avoid delivery by closing expiring contracts and reopening new ones.
👉 Explore leveraged trading opportunities with institutional-grade tools.
_Key Takeaways_:
- Daily mark-to-market settlements ensure liquidity.
- P&L = (Price Change × Point Value) × Number of Contracts.
- Understand leverage risks before trading.