Types of Futures Contracts

A futures contract is an agreement to buy or sell an underlying asset at a predetermined price on a specified future date. The value of the contract is linked to the value of its underlying asset.

For example, if the value of the underlying asset changes, the futures contract linked to it may also change in value.

Exchange-traded futures contracts are standardised. This means details such as the underlying asset, contract size and expiry are set by the exchange rather than being individually negotiated by the buyer and seller.

Both parties have obligations under a futures contract. If a position remains open until expiry, it is settled according to the settlement rules applicable to that particular contract.

Now that you know what futures contracts are, they can broadly be understood based on whether settlement involves delivery of the underlying asset or cash settlement.

Physical settlement involves delivery of the underlying asset according to the contract terms. Stock derivatives in India are subject to mandatory physical settlement at expiry.

Cash settlement does not require the underlying asset to be delivered. Instead, the contract is settled based on the applicable settlement price.

Index futures and currency futures are examples of contracts that are settled in cash. Commodity settlement can vary according to the specifications of the particular commodity contract.

For example, suppose a futures position has a value of ₹2,50,000 and its value becomes ₹3,00,000 at settlement.

• Initial value: ₹2,50,000
• Settlement value: ₹3,00,000
• Difference: ₹50,000

The applicable profit or loss is settled according to the rules of that futures contract.

Additional Read: Difference Between Futures and Options

Futures contracts can be classified according to their underlying asset. Here are the six types discussed in this article.

Stock futures

Stock futures have shares of individual companies as their underlying asset. Stock derivatives that remain open until expiry are physically settled.

When you buy a stock futures contract, you agree to take the applicable position in the underlying shares according to the contract terms at expiry. If you sell the futures contract, your obligation is on the opposite side of that transaction.

Index futures

Index futures have a market index as their underlying. Nifty 50 futures and Bank Nifty futures are some examples.

A market index itself cannot be physically delivered like a share. Therefore, index futures are settled in cash at expiry.

Commodity futures

Commodity futures use commodities as their underlying asset. These may include agricultural as well as non-agricultural commodities.

The settlement method depends on the specifications of the individual commodity contract. Some contracts may involve physical delivery, so you should check the applicable contract terms before expiry.

Currency futures

Currency futures are based on currency pairs. Examples include EUR-USD, GBP-USD and USD-JPY, as well as INR pairs such as USD-INR, EUR-INR, JPY-INR and GBP-INR.

These futures are cash-settled. This means the settlement takes place in money rather than through physical delivery of the currencies.

Interest rate futures

Interest rate futures are linked to interest-bearing securities. Government securities and 91-day T-Bills are examples mentioned in the source article.

Their settlement method depends on the particular futures contract. For example, some interest rate futures may be cash-settled, while the applicable contract specifications determine the final settlement process.

VIX futures

VIX futures are linked to the India VIX, which measures expected market volatility. Their value is connected to changes in the underlying volatility index.

Because the volatility index itself cannot be physically delivered, VIX futures are cash-settled. India VIX futures were historically introduced for trading in India but are not part of the currently offered futures contracts discussed on the exchange's active product pages.