9. What are the Common Underlying Assets in Futures Trading?
In futures trading, the underlying asset is the financial instrument or commodity on which the futures contract is based. The value of the futures contract moves in tandem with the price of this asset.
These assets can belong to various asset classes, each offering unique characteristics, risk-reward profiles, and trading strategies.
Futures exist on:
- Equities (Stocks)
- Stock Market Indices
- Commodities
- Currencies (Forex)
1. Equity Futures (Stock Futures)
These futures are based on individual company shares.
Examples: Reliance Industries, Infosys, HDFC Bank, ITC, TCS
Key Features:
- Speculating on the future price of a stock
- Trade in bulk (lot size) without paying full price upfront
- Physically settled in India (you receive/deliver stock if not squared off)
- Use cases: Hedging, speculative trading, arbitrage
Lot Size Example: Reliance Lot = 250 shares If price = ₹2,500 → Contract value = ₹6,25,000
2. Index Futures
Contracts based on stock market indices (group of companies).
Popular Examples: Nifty 50, Bank Nifty, Nifty IT, Sensex
Key Features:
- Cash-settled (no physical delivery)
- High liquidity, low impact cost
- Use cases: Portfolio hedging, index trading, volatility strategies
3. Commodity Futures
Based on physical goods, traded on commodity exchanges like MCX/NCDEX.
Examples:
- Metals: Gold, Silver, Copper
- Energy: Crude Oil, Natural Gas
- Agri: Cotton, Soybean, Jeera
Key Features:
- Often physically settled
- Used by producers/manufacturers to hedge costs
- Prices influenced by demand-supply, seasonality, geopolitics, weather
Example: Gold Mini Futures Lot = 100 grams If gold = ₹6,000/gm → Contract = ₹6,00,000
4. Currency Futures (Forex Futures)
Based on the exchange rate between two currencies. Traded on NSE, BSE, MCX-SX.
Examples: USDINR, EURINR, GBPINR, JPYINR
Key Features:
- Cash-settled
- Standardized lot sizes (e.g., USDINR = $1,000 per lot)
- Use cases: Import/export hedging, forex speculation, business risk management
Example: USDINR Futures at ₹83, Lot Size = 1,000 Contract Value = ₹83,000 Margin ≈ ₹2,500 (3%)
Comparative Snapshot
| Asset Class | Examples | Exchange | Settlement | Use Case |
|---|---|---|---|---|
| Stock Futures | Reliance, TCS, Infosys | NSE, BSE | Physical | Trading, Hedging, Arbitrage |
| Index Futures | Nifty 50, Bank Nifty | NSE, BSE | Cash | Trend Trading, Hedging |
| Commodity Futures | Gold, Crude, Wheat | MCX, NCDEX | Physical/Cash | Hedging, Speculation |
| Currency Futures | USDINR, EURINR | NSE, BSE | Cash | Forex Hedging, Speculation |
Real-Life Use Case Examples
- A jewellery exporter uses Gold Futures to hedge against gold price fluctuations.
- A trader uses Bank Nifty Futures to profit from bullish momentum in banking.
- An importer hedges INR depreciation using USDINR Futures.
- An investor uses Stock Futures to leverage on expected earnings growth.
Key Takeaways
- Futures exist on multiple asset classes: equity, index, commodity, currency
- Each asset has distinct trading and hedging benefits
- Equity & Index futures suit active market participants
- Commodities diversify and hedge physical risks
- Currency futures are essential for forex exposure