Nifty futures are contracts based on the Nifty 50 index. They represent the country's top 50 companies traded on the National Stock Exchange (NSE). These are a part of Nifty derivatives and allow investors to speculate on index movements and hedge against market risks. Let us understand Nifty future meaning, its characteristics, and several benefits.
Nifty Futures meaning
Nifty Futures are futures contracts based on the Nifty 50 index. It is a benchmark stock index that represents the performance of 50 of the largest and most liquid Indian companies listed on the National Stock Exchange.
Nifty futures are a part of Nifty derivatives and allow traders to:
- Speculate on the future direction of the Nifty 50 index, and
- Hedge against market risks
How are Nifty futures traded?
Nifty futures are traded on the NSE from 9:15 AM to 3:30 PM Indian Standard Time (IST). Let us have a look at some of their standard features:
Contract size
- The value of one Nifty futures contract is calculated by multiplying the current value of the Nifty 50 index by a predetermined multiplier.
- For example,
- Say the Nifty 50 index is trading at 15,000
- The predetermined multiplier is 75
- In such a case, the value of one Nifty Futures contract would be:
- 15,000 x 75 = Rs. 11,25,000
Expiry dates
- Nifty Futures contracts have predefined expiry dates.
- These are usually on the last Thursday of each month.
- However, there also exist quarterly contracts that expire in:
- March
- June
- September, and
- December
Tick size
- The tick size for NSE Futures is 0.05 or 5 paise.
- This means that the smallest price movement for a futures contract on NSE is 5 paise.
Market liquidity
- Nifty futures are one of the most actively traded derivative contracts in India.
- This provides traders with high liquidity and leads to efficient price discovery.
How are Nifty derivatives (futures contracts) settled?
Nifty futures contracts are settled in cash. Upon expiry, the settlement price is determined based on the closing value of the Nifty 50 index on the expiry date. The resulting profit or loss is settled in cash accordingly.
Let us understand the settlement process better through an example.
The scenario
- You hold a long position (meaning you have bought) in one Nifty futures contract.
- You entered the contract when the Nifty 50 index was at 15,000.
- It expires on March 31st.
- On March 31st, the Nifty 50 index closes at 15,200.
- The predetermined multiplier for the Nifty Futures contract is 75.
The settlement price
- The settlement price of the Nifty Futures contract is determined based on the:
- Closing value of the Nifty 50 index, and
- The predetermined multiplier
- Settlement price =
- Closing value of Nifty 50 index × Predetermined multiplier
- 15,200 × 75
- Rs. 11,40,000
The profit or loss
- Nifty futures contracts are settled in cash
- If you have a long position, you will receive cash equal to the difference between the:
- Settlement price, and
- Price at which you entered the contract
- If the settlement price is higher than your entry price, you make a profit.
- Whereas, if it is lower, you incur a loss.
In the instant case, since you entered the contract when the Nifty 50 index was at 15,000, your profit would be:
- Profit = (Settlement price - Entry price) × Number of contracts
= (Rs. 11,40,000 - Rs. 11,25,000) × 1
= Rs. 15,000
Why are the benefits of trading Nifty derivatives (futures contracts)?
Trading Nifty derivatives, especially futures contracts, allows investors to enhance the effectiveness of their investment strategies. Let us study some major benefits:
Diversification |
Liquidity and price discovery |
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How are Nifty futures contracts used for hedging purposes?
Nifty derivatives provide an effective tool for hedging against market volatility. Let us understand through an example:
The scenario
- You hold a portfolio of stocks that closely mirror the Nifty 50 index.
- Your portfolio is worth Rs. 1 crore.
- The Nifty index is at 15,000, and the multiplier is 75.
- You are concerned about potential market volatility.
- To hedge against this volatility, you decide to use Nifty futures contracts.
The hedge ratio
- Firstly, you determine an appropriate hedge ratio.
- This ratio represents the ratio of your portfolio's value to the value of Nifty futures contracts you should buy or sell for effective hedging.
- Typically, this ratio is close to 1.
- You decided on a close-to-1 hedge ratio, meaning you will hedge the entire portfolio value.
The contract size
- With Nifty at 15,000, the contract size would be Rs. 11,25,000 (15,000 * 75).
The hedge
- You decide to sell Nifty futures contracts to hedge against market downturns.
- With a portfolio value of Rs. 1 crore, you sell Nifty futures contracts worth Rs. 1 crore.
The fluctuations
- The market experiences a downturn.
- The value of your portfolio decreases by 5% to Rs. 95,00,000 due to the volatility
The outcome
- Since you sold Nifty futures contracts worth Rs. 1 crore, for every 1% decrease in the Nifty index, your futures position would gain Rs. 75,000 (Rs. 1 crore x 1% x 75)
- In this case, with a 5% decrease in the market, your futures position would gain Rs. 3,75,000 (75,000 x 5)
- Even though your portfolio lost Rs. 5,00,000 in value, your futures position gained Rs. 3,75,000.
- Effectively your net loss reduced to Rs. 1,25,000 (Rs. 5,00,000 - Rs. 3,75,000).
Conclusion
Trading Nifty derivatives, particularly futures contracts, offers investors several benefits, such as diversification, liquidity, and hedging against market volatility. These contracts are settled in cash and provide straightforward means for investors to speculate on index movements or protect their portfolios.
Do you wish to trade in some more types of futures? Learn about commodity futures and index futures today.
