Unit study guide · NISM Series VIII
Application of Futures
13 questions in this unit
What this unit covers
- A trader buys one index futures contract at 24,000. The question assumes a lot size of 50 units. The trader closes the position at 24,180. Ignoring charges, what is the profit?
- A trader sells two index futures contracts at 52,500 and later buys them back at 51,900. Assume a lot size of 25 units per contract. Ignoring charges, what is the total profit?
- An index futures contract is quoted at 53,000 and the problem specifies a contract lot of 25 units. What is the notional contract value?
- What does daily mark-to-market (MTM) settlement of a futures position primarily do?
- A fund holds an equity portfolio worth ₹1.80 crore with a beta of 1.20 relative to Nifty. Assume Nifty futures are at 24,000 and the problem specifies a lot size of 75. Approximately how many Nifty futures contracts should the fund SELL to target a full beta hedge?
- An institutional investor expects to receive cash in three weeks and then buy a diversified equity portfolio. The investor is concerned that the market may rise before the cash is received. Which futures action most directly hedges that risk?
- Open interest in a futures contract is 10,000 contracts. A new buyer and a new seller create 400 additional contracts with each other, and no other positions are opened or closed. What is the new open interest?
- A futures contract rises in price while its open interest also rises materially. Under the commonly used price–open-interest interpretation, this combination is generally described as:
- A trader wants to maintain the same bullish futures exposure beyond the expiry of the near-month contract. Which action best describes a rollover?
- A trader buys the March futures contract on a stock and simultaneously sells the April futures contract on the same stock. The position is best described as a:
- A trader posts ₹3,00,000 as total margin for a long futures position with a notional contract value of ₹18,00,000. The futures price rises by 2% and the position is closed. Ignoring charges and margin changes, what is the return on the margin originally deployed?
- For NIFTY 50 derivative contracts under the lot-size revision that applies from the January 2026 series, the market lot is:
- A futures contract records 50,000 contracts of trading volume during the day, but end-of-day open interest rises by only 4,000 contracts. Which statement is correct?
Key ideas
From the practice bank · 1
A trader buys one index futures contract at 24,000. The question assumes a lot size of 50 units. The trader closes the position at 24,180. Ignoring charges, what is the profit?
For a long futures position, profit = (exit futures price − entry futures price) × . Here, (24,180 − 24,000) × 50 = 180 × 50 = ₹9,000. Remember: Long futures P&L = price change × contract quantity. A price rise benefits the long.
Hint Common mistake: Using the amount or futures price itself instead of the change in price multiplied by contract quantity.
VIII-017From the practice bank · 2
A trader sells two index futures contracts at 52,500 and later buys them back at 51,900. Assume a lot size of 25 units per contract. Ignoring charges, what is the total profit?
A short futures position gains when the futures price falls. Profit = (sell price − buy-back price) × lot size × number of contracts = (52,500 − 51,900) × 25 × 2 = 600 × 50 = ₹30,000. Remember: Short futures P&L = (entry sell price − exit buy price) × total contract quantity.
Hint Common mistake: Using the long-position sign and treating a price fall as a loss to the short seller.
VIII-018From the practice bank · 3
An index futures contract is quoted at 53,000 and the problem specifies a contract lot of 25 units. What is the notional contract value?
Notional contract value = futures price × lot size = 53,000 × 25 = ₹13,25,000. Remember: For a simple index-futures contract, notional value is futures price multiplied by the contract's lot size/multiplier.
Hint Common mistake: Confusing notional contract value with the margin that must be deposited.
VIII-019From the practice bank · 4
What does daily mark-to-market (MTM) settlement of a futures position primarily do?
MTM revalues open futures positions and debits or credits the resulting daily losses or gains according to the applicable settlement process. This prevents all accumulated gains and losses from being deferred until final . Remember: Futures risk is managed partly through daily recognition and settlement of gains and losses.
Hint Common mistake: Thinking MTM means only 'showing' an unrealised P&L without settlement consequences.
VIII-020From the practice bank · 5
A fund holds an equity portfolio worth ₹1.80 crore with a beta of 1.20 relative to Nifty. Assume Nifty futures are at 24,000 and the problem specifies a lot size of 75. Approximately how many Nifty futures contracts should the fund SELL to target a full beta hedge?
Beta-adjusted portfolio exposure = ₹1.80 crore × 1.20 = ₹2.16 crore. One futures contract has notional value = 24,000 × 75 = ₹18,00,000. Hedge contracts = ₹2.16 crore ÷ ₹18 lakh = 12. Because the fund is long the cash portfolio and wants to reduce market exposure, it sells futures. Remember: Portfolio hedge contracts ≈ Portfolio value × beta ÷ Futures contract notional value.
Hint Common mistake: Dividing the raw portfolio value by futures notional and forgetting to adjust for beta.
VIII-021From the practice bank · 6
An institutional investor expects to receive cash in three weeks and then buy a diversified equity portfolio. The investor is concerned that the market may rise before the cash is received. Which futures action most directly hedges that risk?
The investor faces the risk of having to buy equities later at higher prices. A long index-futures position can gain if the market rises, helping offset the higher cash-market purchase cost when the funds become available. This is an anticipatory or long hedge. Remember: Future buyer worried about prices rising → long hedge. Current holder worried about prices falling → short hedge.
Hint Common mistake: Automatically associating 'hedging' with selling futures, regardless of the direction of the underlying exposure.
VIII-022From the practice bank · 7
Open interest in a futures contract is 10,000 contracts. A new buyer and a new seller create 400 additional contracts with each other, and no other positions are opened or closed. What is the new open interest?
counts outstanding contracts, not the sum of the long and short sides separately. When a new buyer and a new seller create 400 contracts, open interest rises by 400, from 10,000 to 10,400. Remember: Open interest is the number of outstanding contracts. One contract has both a long and a short side, but it is counted once.
Hint Common mistake: Adding the buyer's 400 and seller's 400 separately and increasing OI by 800.
VIII-023From the practice bank · 8
A futures contract rises in price while its open interest also rises materially. Under the commonly used price–open-interest interpretation, this combination is generally described as:
A price rise accompanied by rising open interest is commonly interpreted as fresh long participation or 'long build-up'. This is an analytical convention, not proof that prices must continue rising. By contrast, a price rise with falling open interest is commonly associated with . Remember: Price/OI labels are descriptive heuristics: ↑price + ↑OI = long build-up. ↑price + ↓OI = short covering. ↓price + ↑OI = short build-up. ↓price + ↓OI = long unwinding.
Hint Common mistake: Treating these labels as guaranteed forecasts rather than interpretations of current positioning.
VIII-024From the practice bank · 9
A trader wants to maintain the same bullish futures exposure beyond the expiry of the near-month contract. Which action best describes a rollover?
A normally means closing the position in the expiring/near contract and establishing an equivalent-direction position in a later-expiry contract. The trader thereby extends the market exposure into the next contract period. Remember: Rollover changes the contract expiry while preserving the intended market direction.
Hint Common mistake: Thinking rollover means doing nothing and allowing the expiring contract to continue past expiry.
VIII-025From the practice bank · 10
A trader buys the March futures contract on a stock and simultaneously sells the April futures contract on the same stock. The position is best described as a:
A calendar spread uses opposite positions in futures contracts on the same underlying but with different expiry months. The trade is primarily exposed to changes in the price relationship between the two expiries rather than to a simple outright long or short view. Remember: Calendar spreads trade the relative pricing of two expiries on the same underlying.
Hint Common mistake: Calling any two-leg position by one name without checking the expiries and the underlying.
VIII-028From the practice bank · 11
A trader posts ₹3,00,000 as total margin for a long futures position with a notional contract value of ₹18,00,000. The futures price rises by 2% and the position is closed. Ignoring charges and margin changes, what is the return on the margin originally deployed?
A 2% gain on ₹18,00,000 notional exposure produces a profit of ₹36,000. Return on the ₹3,00,000 margin deployed = ₹36,000 ÷ ₹3,00,000 = 12%. This illustrates leverage: the percentage return on margin can be much larger than the percentage move in the futures price. Remember: Leverage means P&L is generated on notional exposure while return is often measured against a much smaller margin amount.
Hint Common mistake: Calculating return using contract value instead of margin when the question asks for return on margin.
VIII-029From the practice bank · 12
For NIFTY 50 derivative contracts under the lot-size revision that applies from the January 2026 series, the market lot is:
NSE Circular NSE/FAOP/70616 revised the NIFTY 50 market lot from 75 to 65. The existing weekly and monthly lot size remained applicable through the December 30, 2025 expiry, after which the revised size applies to the January 2026 series and later applicable contracts. Remember: NIFTY lot size is an exchange specification that can change. Always date-stamp questions that test it.
Hint Common mistake: Memorising an old lot size without checking the effective contract series.
VIII-030From the practice bank · 13
A futures contract records 50,000 contracts of trading volume during the day, but end-of-day open interest rises by only 4,000 contracts. Which statement is correct?
measures trading activity over a period and can include repeated opening, closing and transfer of positions. Open interest measures contracts still outstanding. Therefore, large volume can coexist with a much smaller change in open interest. Remember: Volume is flow. Open interest is the stock of outstanding contracts.
Hint Common mistake: Assuming every traded contract creates one new open contract.
VIII-128Lot size is the number of units of the underlying that one derivatives contract stands for.
Read moreMargin is the money a participant must keep in place to carry a leveraged position.
Read moreExpiry day is the last day on which a derivative contract can be traded.
Read moreOpen Interest (OI) is the number of futures or options contracts in the NSE F&O segment that are still open.
Read moreShort covering is when traders who had sold earlier buy back what they sold.
Read moreRollover means closing a position in an expiring derivative series.
Read moreTraded volume is the quantity that changed hands during a set period.
Read more