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NISM Certifications · NISM-Series-VIII: Equity Derivatives

Introduction to Forwards and Futures for NISM Equity Derivatives

A forward is a private, customised contract to buy or sell an asset at a fixed price on a future date. A futures contract is the standardised, exchange-traded version, with a clearing corporation guaranteeing it and daily mark-to-market. To solve questions, identify long or short, compare the price at settlement with the agreed price, and compute profit or loss.

What this chapter covers

This chapter builds the base for the whole NISM-Series-VIII paper. It starts with what a derivative is, then shows why forwards are flawed, and then explains how futures fix those flaws through standard terms, an exchange, a clearing corporation and margins.

You then learn how a futures position is margined and marked to market each day, how it settles, and how profit and loss look for a long and a short position. The chapter ends by comparing futures with forwards and by explaining open interest.

Later chapters on pricing, trading strategies, options, clearing and settlement and regulation all assume you know this material. If the terms here are weak, those chapters become much harder. The exam is a 100-question, 100-mark, 2-hour online test. The pass mark is 60% and wrong answers carry negative marking of 25% of the marks assigned to the question.

This is a foundation chapter, and its questions are usually direct: definitions, features, margin types, settlement and simple payoff calculations. These are the easiest marks in the paper if your terms are exact. With 25% negative marking, a confident and precise answer earns marks while a guess based on half-remembered wording can cost you. The ideas here also reappear in pricing, strategies and clearing questions, so time spent now pays back across the paper.

Introduction to Forwards and Futures: topics in the order to study them

  1. 1Introduction to Derivatives and TypesStart here because it defines a derivative, its underlying and the four main types, which every later topic uses.
  2. 2Forward Contracts and Their LimitationsLearn the simple over-the-counter contract first, so you can see what problems futures were designed to solve.
  3. 3Futures Contract Features and TerminologyOnce you know the forward's flaws, standardisation, lot size, expiry and the clearing corporation's role make sense.
  4. 4Margining, Mark-to-Market and SettlementMargins and daily settlement are what remove default risk, and they need the terminology from the previous topic.
  5. 5Payoffs for Futures ContractsPayoffs are easy once you understand price movement and daily settlement. Practise long and short positions here.
  6. 6Futures vs Forwards and Open InterestFinish with the comparison and open interest, as this pulls the whole chapter together and works as revision.

How to prepare Introduction to Forwards and Futures

Treat this chapter as a mix of exact definitions and a few simple calculations. Learn the wording first, then practise the numbers until they are automatic.

  1. Read the six topics in the order given and write a one-line definition of each key term in your own words.
  2. Make a two-column list of forward features and futures features. Use it to understand why each futures feature exists.
  3. Learn the margin types and the daily mark-to-market cycle as a sequence: initial margin, daily gain or loss, then settlement.
  4. Practise payoffs with small numbers. For a long position, profit = settlement price − agreed price. For a short position, profit = agreed price − settlement price. Multiply by lot size.
  5. Check every answer for the sign. Ask yourself whether the position is long or short before you calculate.
  6. Take short timed MCQ sets on the chapter. Mark questions where you guessed and revisit those rules.
  7. On the last day, read only your definition list and the payoff formulas.

Common mistakes in Introduction to Forwards and Futures

  • Mixing up the long and short payoffs

    Fix: Remember that a long gains when price rises and a short gains when it falls. Check the sign of your answer against this.

  • Calling initial margin the price of the futures contract

    Fix: Treat margin as a performance deposit that covers possible losses. It is not a purchase price.

  • Saying forwards are guaranteed by an exchange

    Fix: Link counterparty risk with forwards, since they are private OTC deals. Link the clearing corporation guarantee with futures.

  • Forgetting to multiply by lot size

    Fix: Always write profit per unit, then multiply by the lot size or number of units in the question.

  • Counting open interest twice

    Fix: Count each contract once. Open interest is the number of outstanding contracts, not the number of positions on each side added together.

  • Guessing on options that sound similar

    Fix: Skip the question and return later if you cannot recall the rule, and only guess when you can eliminate options.

Last-day revision: Introduction to Forwards and Futures

  • 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.

Introduction to Forwards and Futures practice questions

Introduction to Forwards and Futures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Introduction to Forwards and Futures: frequently asked questions

What is the difference between forwards and futures?

A forward is a customised OTC contract between two parties and carries counterparty risk. A futures contract is standardised, traded on an exchange and guaranteed by the clearing corporation, with daily mark-to-market.

How do I calculate profit on a futures position?

Find the difference between the settlement price and the agreed price. For a long position, profit is settlement price minus agreed price. For a short position, it is agreed price minus settlement price. Multiply by the lot size.

What is mark-to-market in futures?

It is the daily process of calculating gains and losses on open futures positions and settling them. This stops losses from building up unnoticed and reduces default risk.

What is open interest?

Open interest is the total number of futures contracts that are outstanding and not yet closed out or settled. Each contract is counted once, even though it has a buyer and a seller.

Is there negative marking in NISM Equity Derivatives?

Yes. Negative marking is 25% of the marks assigned to a question. Avoid guesses where you cannot narrow the options.