1. What you will learn
By the end of this lesson you will be able to compute the notional exposure a futures position creates, explain why margin is collateral rather than a purchase price or a maximum loss, follow a position through several days of mark-to-market and see where the cash goes, and express leverage as the relationship between a small price move and a large change in collateral. This is education about futures mechanics and is not advice to trade or to use any instrument.
2. The idea explained
A futures contract is an agreement to buy or sell a defined quantity of something at a price fixed today, for settlement later. What matters first is that you have taken on exposure to the whole quantity, not to the money you deposited. Notional value is the quoted price multiplied by the contract multiplier multiplied by the number of contracts, and that figure, not the deposit, is the size of the position you are running.
Margin is collateral. It is money lodged with the broker and passed to the clearing corporation so that the clearing corporation can be confident the position's losses will be met. It is not a down payment on a purchase, it is not the price of anything, and above all it is not a cap on loss. A position can lose more than the margin posted, at which point more money is demanded, and if it is not provided the position is closed out at whatever price the market offers.
Mark-to-market is the mechanism that makes this daily. At the end of each trading day the position is revalued at the settlement price, and the change in value is settled in cash, paid out to the winner and collected from the loser. Over the life of a position these daily amounts sum to the total gain or loss, but the path matters enormously, because an adverse day demands money immediately even if the position later recovers. This is why an economically sound hedge can still fail: the hedge's loss is settled in cash today while the offsetting gain on the physical position is realised months later.
Leverage is the arithmetic consequence. Divide the notional value by the collateral posted and you have the factor by which a percentage move in the price becomes a percentage move in your collateral. A tenfold ratio turns a two per cent price move into a twenty per cent change in the money you have deposited, in either direction.
Finally, specifications. The multiplier, tick size, expiry calendar, whether settlement is in cash or by delivery, and the margin framework are all set by the exchange and its clearing corporation and are revised from time to time. Learn the structure and look up the current figures.
3. The market, the regulator and the rulebook
Exchange-traded derivatives in India operate under the Securities and Exchange Board of India, the statutory securities regulator constituted by an Act of Parliament, which approves contracts and supervises exchanges, brokers and clearing members. The exchanges, principally the National Stock Exchange and the BSE, publish the contract specification for every future: the underlying, the multiplier or lot size, the tick, the expiry calendar, the last trading day, the settlement method and the settlement price methodology.
The clearing corporations are separate entities and they are the ones that matter for margin. They publish the margin framework, including how initial requirements are calculated, how they change with volatility, how positions are marked each day and what happens on a shortfall. They also publish the position limits that apply at client, member and market level.
Never quote a margin percentage, a lot size, a position limit, a transaction charge or a tax rate from memory, including from a course note. Describe how each is determined and name the page where the current figure is published, with the date you read it.
Worked example
4. Worked example
All figures are invented. A fictional future is quoted at one thousand and its contract multiplier is fifty units. A trader buys two contracts.
Notional value is one thousand multiplied by fifty multiplied by two, which is one lakh rupees. That is the exposure, whatever was deposited.
Suppose the price moves twenty points against the position. The loss is twenty multiplied by fifty multiplied by two, which is two thousand rupees.
Now bring in the collateral. Suppose ten thousand rupees was posted. The two thousand rupee loss is twenty per cent of that collateral, while the price moved only two per cent. The ratio between the two is the leverage, which here is one lakh over ten thousand, or ten times. A two per cent move became a twenty per cent change in the deposit because of that factor and nothing else.
Now follow three days of mark-to-market. On day one the price settles at nine hundred and ninety, a fall of ten points, so one thousand rupees is collected from the account in cash. On day two it settles at one thousand and five, a rise of fifteen points from the previous settlement, so one thousand five hundred rupees is paid in. On day three it settles at nine hundred and eighty, a fall of twenty-five points, so two thousand five hundred rupees is collected. The three amounts net to a loss of two thousand rupees, which is exactly the twenty-point fall from one thousand to nine hundred and eighty multiplied by the contract size.
The path is the lesson. The account had to find two thousand five hundred rupees on day three, and an account that could not would have been closed out at that day's price regardless of what happened afterwards.
5. Common mistakes and how to fix them
The first mistake is thinking of margin as the size of the position. Compute notional value explicitly and write it beside the margin so the difference is visible.
The second is treating margin as the maximum loss. State plainly that losses can exceed the deposit and that further amounts will be demanded.
The third is ignoring the path of mark-to-market. Build the daily settlement sequence, not just the start and end prices, and ask whether the cash was available on the worst day.
The fourth is using a remembered multiplier or margin rate. Look both up on the exchange's and clearing corporation's pages and record the date.
The fifth is sizing a position by what the margin permits. Leverage magnifies losses exactly as it magnifies gains, most active traders lose money, no position is safe or guaranteed, past performance does not indicate future results, and a SEBI-registered investment adviser is the person to consult about an individual's own money.
Key takeaways
6. Board summary
Notional value equals quoted price times the contract multiplier times the number of contracts, and that is the size of the exposure. Margin is collateral held against losses; it is neither a purchase price nor a cap on loss. Mark-to-market settles the change in value in cash every day, so the path of prices decides whether an account survives. Leverage is notional value divided by collateral, and it multiplies percentage moves in both directions. Multipliers, margins, position limits and expiry calendars are published by the exchange and clearing corporation and must be looked up.
Check your understanding
7. Practice and self-check
One. A future is quoted at two thousand with a multiplier of twenty-five and three contracts are bought. Notional value? One lakh fifty thousand rupees.
Two. The price falls thirty points. Loss? Thirty times twenty-five times three, which is two thousand two hundred and fifty rupees.
Three. Collateral posted was fifteen thousand. What proportion of it was lost? Fifteen per cent.
Four. What was the percentage price move? One and a half per cent.
Five. What is the leverage factor? One lakh fifty thousand over fifteen thousand, which is ten times.
Six. Day one settles four points down, day two six points up, day three eight points down. What cash moves each day on the three contracts? Three hundred rupees out, four hundred and fifty in, six hundred out.
Seven. What is the net over the three days? Four hundred and fifty rupees out, matching a net six-point fall.
Eight. Can the loss exceed the collateral posted? Yes, and further amounts will be demanded.
Nine. Where do you find the current multiplier and margin framework? The exchange's contract specification page and the clearing corporation's margin circulars, each cited with a date.