A futures contract is an obligation to buy or sell a specific quantity of a commodity, financial instrument or stock index at a fixed price at a particular future date. More precisely stated A futures contract is an agreement between two parties to buy or sell in the future on a designated exchange, a specific quantity of a commodity /currency/stock at a specific price. The underlying may a stock index also. The buyer and the seller of a futures contract agree now on a price for a product to be delivered or paid for at a later date in the future. Actual delivery of the commodity /currency can take place according to the terms of the contract. It is not mandatory to carry over the contract till the maturity date and settle it on the maturity date. In practice, most futures contracts are closed out or offset prior to maturity.

In fact In India, the derivatives market commenced with the inauguration of index-futures trading in the stock exchange (BSE) on June 9, 2000 by J.R. Verma the member of SEBI.

Futures trading will be of interest to those who wish to:

1. Invest - take a view on the market and buy or sell Nifty Futures accordingly. Instead of investing in a particular stock and holding the stock and thereby taking on the risks of price movements associated in that particular stock, they can trade the entire market by buying or selling the Nifty futures

2. Hedge - Reduce the risk associated with exposures by taking a counter positions in the futures market, i.e. buy stock, sell futures

3. Arbitrage - Take advantage of the price difference between the Futures and Cash markets.

Although there is a potential for huge profits, futures trading is risky and should not be undertaken without extensive preparation. Buying a futures contract obligating you to take delivery of the underlying commodity is known as taking a long position. For example, if you believe the price of gold will rise, you might buy a futures contract obligating you to accept delivery of 100 troy ounces of gold for $390 an ounce on January 20. You would profit if the price of gold rises, but you would lose if the price of gold drops. If you believe gold will fall, you can sell a futures contract short, or take a short position. The potential profit (and risk) of futures trading stems from the fact that you are highly leveraged, only putting up a small percentage, usually between 5% and 10%, of the contract's value to be a player (the margin). However, you are obligated for the entire price movement in the contract. Be careful: the opportunity to make big gains quickly also means you can lose your margin or more just as quickly.

When the underlying of a futures contract is a stock index, then it is an index future. In India, the futures are traded on S.P SNX Nifty/Sensex because these two are the reliable indicators of the functioning of the Indian stock market and also because the institutional investors in India and abroad, money managers and small investors use it for describing the general trend the market would take. The S.P SNX Nifty/Sensex also serves as good proxies for the Indian stock markets.

A futures contract is an obligation to buy or sell a specific quantity of a commodity, financial instrument or stock index at a fixed price at a specific date in the future. An option is an instrument that gives the owner the right -- but not the obligation -- either to buy or sell the underlying stock, index or futures contract at a set price for a particular period of time, usually a few months. Like futures, options are also speculative, but they have one advantage over futures: The amount of money you can lose is limited to the amount of money you paid for the option premium.

The spot market is the cash market, i.e., current cash prices. The futures market is predetermined future prices. The futures price may or may not end up being the spot price when that future date arrives.

In a true cash market, when a trade takes place today, delivery and payment would also take place today (or a short time later). Settlement procedures like T+3 would qualify as "cash markets" in this sense, and of the equity markets in the country, only OTCEI is a cash market by this definition.

For the rest, markets like the BSE or the NSE are classic futures market in operation. NSE's equity market, for example, is a weekly futures market with Tuesday expiration. When a person goes long on Thursday, he is not obligated to do delivery and payment right away, and this long position can be reversed on Friday thus leaving no net obligations with the clearinghouse (this would not be possible in a T+3 market). Like all futures markets, trading at the NSE is centralised, the futures markets are quite liquid, and there is no counterparty risk.

Arbitrage is an investment technique used by big Wall Street firms and high-rolling investors to cash-in on seemingly insignificant differences between stock indexes and futures contracts on those indexes. Indexes, and futures contracts on those indexes, don't always move in lock-step. When they get out of whack, a nimble arbitrageur can make a lot of money by buying the less expensive one and selling the one that's more expensive. "Arbs," as they're called, depend on computers. When all the arbs move in the same direction, the overall market can go haywire. Anytime the stock market dramatically surges or falls, it's a pretty safe bet that the arbitrageurs were somehow involved. That said, arbitrage can also function as a market equalizer, restoring price equilibrium.

A long futures position results from buying futures contracts and a short futures position results from selling futures contracts. Generally, you take a long futures position if you anticipate a rise in the price of the underlying commodity and a short futures position if you anticipate a decline in the price of the underlying commodity.

Hedging is risk management. Futures can be used to hedge against interest rate and price risks. The position you take determines the type of hedge. A short hedge is created by selling futures contracts and a long hedge is created by buying futures contracts. For example, if the investor expects a decline in the stock market and he has a stock portfolio, he might sell stock index futures, thus taking a short hedge. What this means is that he has locked in a price to sell the index now for delivery sometime in the future. Should the market decline, he would realize a loss in the value of his stock portfolio but also a gain in your futures position, since the futures contracts are valued at the higher price stated in the futures contract. One position offsets (or partially offsets) the other, reducing the risk of loss.

The clearinghouse is a financial institution associated with the futures and options exchanges that guarantees the financial integrity of the market and the performance on futures and options contracts. It can be considered a third party between the buyer and seller of futures and options contracts, taking no active position in the market but assuring that for every short position there is a long position

1. S&P CNX Nifty Futures / Mark to Market and final

2. Futures on individual securities settlement be settled in cash on T+1 basis

3. S&P CNX Nifty Options Cash settlement on T+1 Basis

4. Options on individual securities Premium settlement on T+1basis and

5. option exercise settlement on T+3 basis.

1. S&P CNX Nifty Futures / Futures Daily settlement price will be on individual securities the closing price of the futures contracts for the trading day and the final settlement price shall be the closing value of the underlying index/ security on the last trading day

2. S&P CNX Nifty Options /Options: The settlement price shall be on individual security, closing price of the underlying security

The trading volumes on NSE's Derivatives market has seen a steady increase since the launch of the first derivative contract. The total turnover at the FO segment of NSE during January 2004 was Rs.324063 Crores.