Explain the relevant futures terminologies with a snap quote of today's Nifty Future

Explain the following terminologies - Spot price, Futures price, Contract cycle, Expiration day, Tick Size, Contract size and contract value, Basis, Margin Account - Initial margin, Marking to Market(MTM), Open Interest and Volumes traded, Price band


Consider the snap quote of Nifty futures on December 5th, 2016:

1. Instrument type         :  Future Index
2. Underlying asset        :  Nifty
3. Expiry date                :  29th December, 2016
4. Open Price                 :  8092
5. High price                   :  8175
6. Low price                    :  8076
7. Closing price               :  8109
8. Last traded price          :  8173
9. Volume                        :  9409800  
10. Turnover in lakhs        :  765000
11. Underlying value         :  8128.75
12. Open interest             :  16122675

1. Spot price: This is the underlying value of Nifty in the cash market which is 8128.75

2. Futures price: The price of the futures contract in the futures market. Here, we consider the LTP of the day which is 8173.

3. Contract cycle: It is a fixed period in which the future trades after which it is expired. In NSE, the max number of index futures
is of 3 months contract cycle - current month, next month and far month. Every current future expires on the last Thursday of the month.
The contact cycle for Nifty Future Dec 2016 is 29th Sept to 29th Dec.

4. Expiry day: The last trading day of the contract after which it ceases to exist. For the Dec 2016 contract, it is the last Thursday of Dec 2016 which is 29th Dec. If the last Thursday is a holiday, then the contracts expire on the previous trading day. Rollover can be executed by selling the current month contract and buying the next month contract at the same time for a long position.

5. Tick size: It is the minimum movement allowed in an entity. Exchange decides the tick sizes on traded contracts as per contract specs.
Tick size for Nifty is 0.05(5 paisa).

6. Contract size and contract value: Futures contracts is traded in lots and the lot size for Nifty is 75. For the contract value, we have to multiply the contract size with the traded price.
For 1 lot, as per closing price, the contract value will be 75*8109 = Rs 6,08,175.

7. Basis: It is the difference between the spot price and the futures price. If the futures price is greater than the spot price, basis is negative. If spot is greater than future price, then basis is positive.

On Dec 5th 2016, the basis = spot - future = 8128.75 - 8173 = -44.25(Negative!)

* Basis difference between 1 month and 2 months futures contract should essentially be equal to the cost of carrying the underlying asset between first and second month>
* The basis, whether positive or negative, turns to 0 at expiry of the contract.

8. Cost of carry: For derivatives, it is the interest paid to finance the purchase minus the income earned on it.

9. Margin account: Exchange charges various margins from broker to ensure trade settlement and in turn, the broker charges margins from their customers:

a. Initial Margin: The amount required to be deposited in the margin account in order to enter a futures contract.
It is the contract value divided by the leverage provided by broker.

* Initial margin depends on price movement of underlying asset. As high volatility assets carry more risk, exchange charges higher initial margin on them.

10. Marking to Market(MTM): Contracts are settled(profits and losses are settled) on a day-to-day basis called mark to market settlement.

* the exchange collects these MTM margins from the loss making participants and pays to the gainers on a day-to-day basis.

for ex, if a person carries one lot(75 qty) of Nifty on Dec 5th at 8153 and the LTP is 8173, he gains 20 points on the contract. His net gain is 75*(8173-8153) = Rs.1500.
This money will be credited to his account and the next day his position will start at 8173.

11. Open interest: OI is the total number of outstanding contracts(Yet to be settles) for an underlying asset. The number of open long futures is equal to the number of open short futures.
Only one side of the contracts is considered while calculating open interest. The OI in this case is 16122675. The level of OI indicates the depth in the market.

12. Price band: It is the price range within which the contract is permitted to trade during a day. This band is calculated w.r.t previous day closing price.

* On the first trading day of the contract, the price band is decided based on the closing price of the underlying asset in the cash market.