Skip to content

NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures

Futures Contract Features and Terminology for NISM Equity Derivatives

Updated 11 October 2026 · Fact-checked

A futures contract is a standardised, exchange-traded agreement to buy or sell an asset at a set price on a future date. The exchange fixes lot size, tick size and expiry. Basis is spot price minus futures price. Cost-of-carry pricing gives futures price = spot × e^(rT), or S × (1 + r × t) in simple form.

Understand Futures Contract Features and Terminology

A futures contract is an agreement to buy or sell an underlying at a price fixed today, with delivery or settlement on a future date. Unlike a forward, it is standardised and traded on an exchange. The exchange decides what you can trade, so you only choose price, quantity (in lots) and expiry month.

Learn the standard terms. Spot price is the price of the underlying in the cash market today. Futures price is the price of the futures contract in the futures market. Contract cycle is the series of expiry months available for trading at a time. Expiry date is the last day the contract trades and is settled. Lot size (market lot) is the fixed quantity of the underlying in one contract. Tick size is the minimum price movement allowed in the contract price. Always check the exchange's current contract specifications for actual values, because they are revised from time to time.

Basis is the gap between spot and futures prices. In NISM usage, basis = spot price − futures price. When the futures price is above spot, basis is negative. This is called contango, and it is the normal state when carrying costs are positive. When futures trade below spot, basis is positive. This is backwardation. On expiry, the futures price converges to the spot price, so basis moves towards zero.

Cost of carry is the cost of holding the underlying until the futures expiry. It includes interest (financing cost), plus storage and insurance for commodities, minus any income earned such as dividends. Futures price is fair when it equals spot plus net cost of carry. If it is not, arbitrageurs buy the cheaper side and sell the dearer side until the gap closes.

For stocks and indices, there is no storage cost, so the carry is mostly interest minus expected dividend. A higher interest rate or a longer time to expiry raises the futures price. Higher expected dividends lower it.

Key formulas to remember

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.

How to solve Futures Contract Features and Terminology questions

Most terminology and pricing questions fit one pattern. Identify what is asked, pick the right definition or formula, and check the sign.

  1. 1Read the last line first and note what is asked: a term, basis, fair futures price, or contract value.
  2. 2If it asks for a term, match it to the exact definition: spot, futures, lot size, tick size, expiry, contract cycle.
  3. 3For basis, write Spot − Futures and compute. Note whether the question uses a different sign convention.
  4. 4For fair futures price, list S, r, time and any dividend. Convert days to years by dividing by 365.
  5. 5Choose the formula: simple interest if the question says so, continuous compounding if it gives e^(rT) or says continuous.
  6. 6Calculate step by step, then subtract any dividend.
  7. 7Compare the answer with the options. Eliminate those that go the wrong way, for example a futures price below spot with positive interest and no dividend.
  8. 8Check units: price per unit versus per lot, and years versus days.

Quickest way: Direction check and round-number estimate

When to use it: Use when the question asks for futures price or basis and the options are far apart.

  1. Decide the direction first. Positive interest and no dividend means futures price is above spot.
  2. Estimate the carry: spot × rate × (days ÷ 365).
  3. Add it to spot. Subtract any dividend.
  4. Pick the option nearest to your estimate, then verify the last digits only if two options are close.
  5. For basis, flip the sign of (futures − spot) and check that contango gives a negative basis.

Common mistakes in Futures Contract Features and Terminology

  • Calculating basis as futures price minus spot price.

    Many sources use the opposite convention, so students mix them up.

    Fix: For NISM, use Spot − Futures. Remember that contango then gives negative basis.

  • Confusing lot size with tick size.

    Both are fixed by the exchange and sound like contract size.

    Fix: Lot size is the quantity in one contract. Tick size is the smallest price move.

  • Using days instead of years in the cost of carry formula.

    The time period is given in days, and students skip the conversion.

    Fix: Divide days by 365 before multiplying by the annual rate.

  • Adding dividends to the futures price.

    Students treat the dividend as a cost of holding the stock.

    Fix: Dividend is income for the holder, so it reduces the cost of carry and lowers the futures price.

  • Saying futures price must equal spot before expiry.

    Convergence at expiry is overextended to earlier dates.

    Fix: They are equal only at expiry. Before that, the gap reflects net cost of carry.

  • Treating contango and backwardation as the same as rising and falling markets.

    The terms sound like price trends.

    Fix: They describe the futures price relative to spot: above is contango, below is backwardation.

Worked examples

Example 1

A stock trades at ₹500 in the cash market. The risk-free rate is 8% per annum with simple interest. No dividend is expected. What is the fair price of a futures contract expiring in 73 days?

Show the solution
  1. S = ₹500, r = 0.08, t = 73 ÷ 365 = 0.2.
  2. Carry = 500 × 0.08 × 0.2 = ₹8.
  3. F = S + carry = 500 + 8 = ₹508.

Answer: The fair futures price is ₹508.

Example 2

Spot Nifty is 24,000. The near-month futures trade at 24,120. The lot size is 75. What is the basis, and what is the value of one futures contract at the futures price?

Show the solution
  1. Basis = Spot − Futures = 24,000 − 24,120 = −120.
  2. Negative basis means futures are above spot, which is contango.
  3. Contract value = Futures price × Lot size = 24,120 × 75.
  4. 24,120 × 75 = 18,09,000.

Answer: Basis is −120 points (contango). Contract value is ₹18,09,000.

Exam tips

  • Learn the basis sign convention: Spot − Futures. If the question states its own convention, follow it.
  • Do not memorise lot sizes or tick sizes as they change. Learn the definitions and the logic of how to use them.
  • Expect direction questions such as what happens to futures price if interest rates rise or dividends increase.
  • With negative marking, skip a numerical question if you cannot finish it in under a minute and the options look close.
  • Remember that futures are standardised and exchange-traded, while forwards are customised and OTC.

Practice questions from Introduction to Forwards and Futures

Futures Contract Features and Terminology: frequently asked questions

What is basis in futures trading?

Basis is the difference between the spot price and the futures price of the same underlying. In NISM it is Spot − Futures. It narrows towards zero as expiry nears.

What is the difference between lot size and tick size?

Lot size is the fixed quantity of the underlying in one futures contract. Tick size is the minimum price change allowed in the contract price. Multiply the two to get the rupee value of one tick.

How do you calculate futures price using cost of carry?

Add the net cost of carry to the spot price. With simple interest, F = S × (1 + r × t). With continuous compounding, F = S × e^(rT). Subtract any dividend you expect to receive before expiry.

What is a contract cycle?

It is the set of expiry months for which contracts are available at a given time. When the nearest contract expires, a new contract is introduced so the cycle continues.