Explanation of Future Contract with a simple example

For example, Crude Oil is currently selling at $60 a barrel, and a futures contract for $65 per barrel is available for three months’ time. As you believe the price of WTI will rise beyond $65 by the time of expiry, you buy the contract.

The market actually rises to $75. That means your prediction is correct and you could buy Crude at $65 per barrel and sell it on for $10 profit.

However, if your prediction was incorrect, and the market ended up short of $65, your contract could result in you paying above the market price in order to settle your contract.

Components

1. Instrument Type:

If the underlying asset is the stock, of the futures contract in which we are entering then we check the details of Stock Futures.

Thus the instrument type is the ‘stock futures’

2. Symbol:

This is the symbol of the stock that is Reliance, TCS Industries in this case.

3. Expiry Date:

This is the date on which the contract ends.

The RELIANCE, TCS futures contract will expire on 27th Aug 2022 that is the last Thursday of the current month.

4. Underlying Value:

This is the price at which the underlying asset is trading in the spot market.

We can see that the current spot price is Rs.2147.80 per share.

5. Market lot (lot size):

As futures contracts are standardized contracts, lot size is also fixed.

The lot size refers to the minimum number of shares that can be bought or sold if we want to enter into an agreement.