Understanding Derivatives: Future and Option Contracts on NSE

What are derivatives?

Derivative, the noun is defined as something which is based on another source.

Future & Option contracts

Futures and options are the two most common derivatives in NSE.

What are Future Contracts?

A future contract is a legal agreement to buy or sell a particular commodity, asset, or security at a predetermined price at a specified time in the future.

Future Contracts on NSE

On the stock exchange, we can trade futures for stocks and Indexes. In stock futures the underlying is a particular stock like RELIANCE or INFOSYS among many others. And for Index futures, the underlying is the Index like NIFTY50, NIFTY BANK. A future contract exists for commodities and currencies as well. But they are on a different exchange, MCX exchange is for commodities like gold, silver, nickel, copper, and natural gas. The good thing about an exchange is that there is no single buyer or seller. There are multiple participants, each having their own biases about various assets.

Why do we use future contracts?

In summary future contracts are used to reduce risk on the underlying. In the case of the farmer, he is trying to reduce his risk w.r.t demand for his product.


In this article, we talked about

  • Expiry date
  • Lot size
  • Open interest
  • Margin




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