NISM Certifications · NISM-Series-VIII: Equity Derivatives

Introduction to Forwards and Futures: formula sheet

Full chapter guide

Key formulas

Derivative: Value of derivative = f(price of underlying); The contract's value depends on the underlying. The underlying can be financial or commodity-based.
Forward vs future: Forward = OTC, customised | Future = exchange-traded, standardised; Both create an obligation for both parties to transact at a fixed price on a future date.
Option rights: Buyer: right, no obligation | Seller (writer): obligation if buyer exercises; Call = right to buy. Put = right to sell. The buyer pays a premium.
Swap: Swap = exchange of cash flows between two parties; Common examples are interest rate swaps and currency swaps. Usually OTC.
Participant roles: Hedger = reduces risk | Speculator = takes risk for profit | Arbitrageur = locks in price-gap profit; Match the intent in the question to the role.
Payoff to long forward at maturity: Payoff = Spot price at maturity − Forward price; Positive if spot ends above the forward price. Per unit of the asset.
Payoff to short forward at maturity: Payoff = Forward price − Spot price at maturity; It is the exact opposite of the long payoff. One party's gain equals the other's loss.
Core features of a forward: Customised + OTC + bilateral + settled at maturity + no clearing guarantee; Use this checklist to judge any statement in an MCQ.
Main limitations: Counterparty risk, illiquidity, no standardisation, search cost; Remember these four. Each follows from the contract being private and customised.
Basis: Basis = Spot price − Futures price; Negative in contango, positive in backwardation. Check which sign convention the question states.
Cost of carry pricing (continuous compounding): F = S × e^(rT); r is the annual risk-free rate as a decimal. T is time to expiry in years.
Cost of carry pricing (simple interest): F = S × (1 + r × t); t = days to expiry ÷ 365. Use this only when the question gives simple interest.
Pricing with known dividend: F = S × (1 + r × t) − Dividend; Use when a dividend is received before expiry. Dividend lowers the futures price.
Contract value: Contract value = Futures price × Lot size; Value of one contract. Multiply by number of lots for total exposure.
Profit or loss per tick: Value of one tick = Tick size × Lot size; Gives the rupee change in a contract for one minimum price move.
Convergence: At expiry, Futures price = Spot price; So basis becomes zero at expiry.
Daily MTM profit or loss (long futures): (Today's daily settlement price − Previous day's settlement price) × Quantity; Positive means the long receives money. Negative means the long pays.
Daily MTM profit or loss (short futures): (Previous day's settlement price − Today's daily settlement price) × Quantity; The short gains when the price falls. It is the opposite sign of the long.
MTM on the day a trade is made: (Daily settlement price − Trade price) × Quantity for a long position; On day one, use the trade price as the reference, not the previous settlement price.
Final MTM on expiry day: (Final settlement price − Previous day's settlement price) × Quantity for a long; This is only the last day's MTM, paid in cash. For index futures, the final settlement price is the closing price of the index on expiry day and the contract ends in cash. For stock futures, open positions are then settled by physical delivery.
Quantity: Quantity = Number of lots × Lot size; Always convert lots into units before computing.
Total profit over the life of a position: Sum of all daily MTM amounts = (Final settlement price − Original trade price) × Quantity for a long; Use this to check your daily working.
Payoff of long futures: (S − F) × quantity; S = price of the underlying (or futures) at close or expiry. F = entry price of the futures. Positive means profit.
Payoff of short futures: (F − S) × quantity; Mirror image of long. You gain when S falls below F.
Quantity: Market lot × number of lots; Always multiply by the full quantity, not by one unit.
Breakeven: Breakeven price = entry price F; For both long and short futures, before any charges. Payoff is zero at S = F.
Long + short on same contract: Long payoff + Short payoff = 0; Gain of one party equals loss of the other.
Forwards vs futures: core contrast: Forward = customised + OTC + counterparty risk + no daily MTM | Futures = standardised + exchange-traded + clearing corporation guarantee + daily MTM and margins; Most MCQs test one of these pairs. Match each feature to the right contract.
Open interest change rule: Both open new → OI rises by 1 | Both close existing → OI falls by 1 | One opens, one closes → OI unchanged; OI counts each long-short pair once, not twice.
Volume vs OI: Volume = contracts traded in a period | OI = contracts outstanding at a point in time; Volume can never fall during a day. OI can rise or fall.

Quick revision

A derivative derives its value from an underlying asset, rate or index.
The four main types are forwards, futures, options and swaps.
A forward is an OTC, customised contract with no exchange guarantee, so it carries counterparty risk.
Futures are standardised, exchange-traded contracts guaranteed by the clearing corporation.
The long position buys at the agreed price; the short position sells at it.
Futures are marked to market daily, so gains and losses are settled each day.
Initial margin is collected upfront to cover potential losses; it is not the price of the contract.
Long futures profit = settlement price − agreed price, multiplied by quantity.
Short futures profit = agreed price − settlement price, multiplied by quantity.
Futures gains and losses of the two sides are equal and opposite; one side's gain is the other's loss.
Open interest is the total number of outstanding contracts that have not been closed out or settled.
Each open contract has one long and one short, so open interest counts contracts, not both sides separately.

Common mistakes

Saying a derivative has its own independent value. Fix: Remember that a derivative's value is derived from its underlying and changes when the underlying changes.
Confusing forwards and futures. Fix: Ask where it trades and who sets the terms. Customised and private is forward. Standardised and on an exchange is future.
Saying forwards are traded on exchanges. Fix: Forwards are OTC and bilateral. Only futures are exchange-traded and standardised.
Believing a clearing corporation guarantees a forward. Fix: A forward has no central guarantee. That is exactly why counterparty risk exists.
Calculating basis as futures price minus spot price. Fix: For NISM, use Spot − Futures. Remember that contango then gives negative basis.
Confusing lot size with tick size. Fix: Lot size is the quantity in one contract. Tick size is the smallest price move.
Thinking initial margin is the price of the futures contract or a fee that is lost. Fix: Remember that margin is a refundable security deposit. The futures buyer pays no premium. Only option buyers pay a premium.
Using the trade price as the reference on every day. Fix: Daily MTM uses the previous day's settlement price. Only day one uses the trade price.
Reversing the sign for a short position Fix: Say it aloud: short gains when price falls. Use (F − S) for short.
Forgetting to multiply by the lot size Fix: Always write quantity first. Payoff is per unit difference × total units.

Exam tips

Learn one-line definitions of the four contract types word for word. Questions often reuse them.
Watch for the words 'right' and 'obligation'. They separate options from forwards and futures.
For participant questions, judge the purpose of the trade, not the instrument used.
Remember that forwards and swaps are typically OTC, while futures and exchange-traded options are standardised.
In negative-marking papers, skip only if you cannot eliminate two options. Definition questions usually allow elimination.
Expect statement questions asking which feature belongs to forwards and which to futures. Learn the contrast pairs: OTC and exchange, customised and standardised, bilateral and guaranteed.
A common trap gives a forward a futures feature such as daily margining or a clearing corporation guarantee. Reject it.
Wrong answers cost marks in this paper, so if you cannot tell between two options, test each against the words customised, private and no guarantee before guessing.