Chapter 1 of 8

Futures contracts, lots and notional exposure

Read the contract specification before doing P&L arithmetic: underlying, expiry, quote unit, lot size, tick and settlement.

3 min read · Original educational chapter

In this chapter

A contract creates an obligation
Use consistent units
Margin finances risk; it does not cap loss
Decision lab: Collateral and exposure answer different questions
Worked example
Common mistakes
Check your understanding

A contract creates an obligation #

A futures contract standardizes an agreement whose economic value depends on an underlying asset or index. The long side gains from a rise in the futures price and loses from a fall; the short side has the opposite linear price exposure. Neither side pays the entire notional value merely as an option premium.

The contract identifies what is being referenced, how prices are quoted, how much one lot represents, when trading ends and what settlement entails. These terms can differ across venues and expiry series. A familiar symbol is not a complete contract description.

Use consistent units #

For a contract quoted per unit, notional = futures price × units per lot × lots. If the price is quoted per 10 grams but the contract represents 1,000 grams, there are 100 quotation units in a lot. Multiplying the quote by 1,000 without adjusting the quote base creates a tenfold error.

Tick size is the minimum permitted price increment. Rupee value per tick equals tick size × the relevant price multiplier × lots. It does not equal the entire contract value or the initial margin.

Margin finances risk; it does not cap loss #

Margin is collateral or funding required against potential obligations. The blocked amount can change with risk parameters and positions. Losses on the notional exposure can exceed the initial deposit. Opening a short future does not require owning the underlying in every product, but settlement obligations still apply.

Read the current official specification and the broker’s risk rules before an actual transaction. Contract sizes, expiry calendars and permitted positions can change. The numerical examples here are fictional and do not identify a trade.

Decision lab: Collateral and exposure answer different questions #

A fictional 200-unit contract quoted at 1,000 has ₹2,00,000 notional exposure. If a hypothetical margin is ₹25,000, a 5% price fall still creates ₹10,000 of price loss, or 40% of that initial margin before costs. Margin is not a leverage-free cash investment amount.

Calculate the effects of price moves, multiplier changes and collateral calls separately. State whether a reported return uses notional, eligible resources or account equity. Comparing percentages with different denominators can exaggerate a trading story.

Hypothetical worked example

One price point is multiplied by the contract

A fictional index future is quoted at 12,000 with 40 units per lot. One lot represents ₹4,80,000 notional exposure. A 25-point move changes gross value by 25 × 40 = ₹1,000 for one lot.

If an assumed margin were ₹60,000, that funding would represent only one-eighth of the notional. A 5% adverse move in the notional is ₹24,000, not 5% of ₹60,000. The assumed margin is not a real quote or a loss limit.

For a hypothetical bullion contract quoted per 10 grams with 1,000 grams per lot, use 100 quotation units. The futures P&L calculator asks for that multiplier explicitly.

Common mistakes

Using the deposited margin as the exposure.
Multiplying by physical grams without checking the quote base.

Check your understanding

A futures price moves 10 points with a multiplier of 40. What is one lot’s gross P&L magnitude?

Make this chapter useful

Can you defend the reasoning?

Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.

Sources and further reading

Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.

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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.