A future contract is a standardized, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency or stock index at a specified price, on a particular future date. The risk to the holder while author index stock type gallery in futures is unlimited, and because the payoff pattern is symmetrical, the risk to the seller is unlimited as well. Futures contracts are forward contracts, meaning they represent a promise to make a certain transaction at a future date. The exchange of assets occurs on the date specified in the contract. Futures are distinguished from generic forward contracts in that they contain standardized terms, trade on a formal registered exchanges.

Characteristics of futures trading

A "Futures Contract" is a highly standardized contract with certain distinct features. Some of the important features are as under:

a. A future trading is necessarily organized under the auspices of a market association so that such trading is confined to or conducted through members of the association in accordance with the procedure laid down in the Rules & Bye-laws of the association.

B.It is invariably entered into for a standard variety known as the "basis variety" with permission to deliver

C.The units of price quotation and trading are fixed in these contracts, parties to the contracts not being capable of altering these units. D.The delivery periods are specified. E.The seller in a futures market has the choice to decide whether to deliver goods against outstanding sale contracts. In case he decides to deliver goods, he can do so not only at the location of the Association through which trading is organized but also at a number of other pre-specified delivery centers.

F.In futures market actual delivery of goods takes place only in a very few cases. Transactions are mostly squared up before the due date of the contract and contracts are settled by payment of differences without any physical delivery of goods taking place.

  Evolution of Futures Trading and its Present Status  

Organized futures market evolved in India by the setting up of "Bombay Cotton Trade Association Ltd." in 1875. In 1893, to improve the facilities of the exchange for the merchants and cotton mil owners a separate association by the name "Bombay Cotton Exchange Ltd." was constituted. Futures trading in oilseeds were organized in India for the first time with the setting up of Gujarati Vyapari Mandali in 1900, which carried on futures trading in groundnut, castor seed and cotton.

Futures trading in Raw Jute and Jute Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd., in 1919. Later East Indian Jute Association Ltd. was set up in 1927 for organizing futures trading in Raw Jute. In case of wheat, futures markets were in existence at several centers at Punjab and U.P. The most notable amongst them was the Chamber of Commerce at Hapur, which was established in 1913.

Futures market in Bullion began at Bombay in 1920 and later similar markets came up at Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and Calcutta.

After independence, the Constitution of India started the concept of Stock Exchanges and futures markets". A Bill on forward contracts was referred to an expert committee and the selected Committees of Parliaments and finally in December 1952 Forward Contracts (Regulation) Act, 1952, was enacted. The Act provided for 3-tier regulatory system;

(a) An association recognized by the Government of India on the recommendation of Forward Markets Commission,

(b) The Forward Markets Commission (it was set up in September 1953) and

(c) The Central Government.

Forward Contracts (Regulation) Rules were notified by the Central Government in July, 1954

The Act divides the commodities into 3 categories with reference to extent of regulation. Such as:

(a) The commodities in which futures trading can be organized under the auspices of recognized association.

(b) The Commodities in which futures trading is prohibited.

(c) Those commodities which have neither been regulated for being traded under the recognized association nor prohibited are referred as Free Commodities author index stock type gallery and the association organized in such free commodities is required to obtain the Certificate of Registration from the Forward Markets Commission.

In the seventies, most of the registered associations became inactive, as futures as well as forward trading in the commodities for which they were registered came to be either suspended or prohibited altogether.

The Khusro Committee (June 1980) had recommended reintroduction of futures trading in most of the major commodities , including cotton, kapas, raw jute and jute goods and suggested that steps may be taken for introducing futures trading in commodities author index stock type gallery, like potatoes, onions, etc. at appropriate time. The government, accordingly initiated futures trading in Potato during the latter half of 1980 in quite a few markets in Punjab and Uttar Pradesh.

After the introduction of economic reforms since June 1991 and the consequent gradual trade and industry liberalization in both the domestic and external sectors, the Govt. of India appointed in June 1993 one more committee on Forward Markets. The Committee submitted its report in September 1994. The report included the trading in other commodities which included basmati rice, gur etc.

The committee also recommended that some of the existing commodity exchanges particularly the ones in pepper and castor seed, may be upgraded to the level of international futures markets.

The liberalized policy being followed by the Government of India and the gradual withdrawal of the procurement and distribution channel necessitated setting in place a market mechanism to perform the economic functions of price discovery and risk management.

The National Agriculture Policy announced in July 2000 and the announcements of Finance Minister in the Budget Speech for 2002-2003 were indicative of the Governments resolve to put in place a mechanism of futures trade/market. As a follow up the Government issued notifications on 1.4.2003 permitting futures trading in the commodities, with the issue of these notifications futures trading is not prohibited in any commodity author index stock type gallery. Options trading in commodity are, however presently prohibited.

Economic Benefits of the Futures Trading and its Prospects:

Futures contracts perform two important functions of price discovery and price risk management with reference to the given commodity. It is useful to all segments of economy. It is useful to producer because he can get an idea of the price likely to prevail at a future point of time and therefore can decide between various competing commodities, the best that suits him. It enables the consumer get an idea of the price at which the commodity would be available at a future point of time. He can do proper costing and also cover his purchases by making forward contracts. The futures author index stock type gallery is very useful to the exporters as it provides an advance indication of the price likely to prevail and thereby help the exporter in quoting a realistic price and thereby secure export contract in a competitive market. Having entered into an export contract, it enables him to hedge his risk by operating in futures market. Other benefits of futures trading are:

1. Price stabilization-in times of violent price fluctuations - this mechanism dampens the peaks and lifts up the valleys i.e. the movement of price variation is reduced.

2. Leads to integrated price structure throughout the country.

3. Facilitates lengthy and complex, production and manufacturing activities.

4. Helps balance in supply and demand position throughout the year.

5. Encourages competition and acts as a price barometer to farmers and other trade functionaries.

Futures trading are also capable of being misused by unscrupulous speculators. In order to safeguard against uncontrolled speculation certain regulatory measures are introduced from time to time. They are:

a. Limit on open position of an individual operator to prevent over trading;

B.Limit on price fluctuation (daily/weekly) to prevent abrupt upswing or downswing in prices;

C.Special margin deposits to be collected on outstanding purchases or sales to curb excessive speculative activity through financial restraints;

D.Minimum/maximum prices to be prescribed to prevent future prices from falling below the levels that are un remunerative and from rising above the levels not warranted by genuine supply and demand factors.

During shortages, extreme steps like skipping trading in certain deliveries of the contract, closing the markets for a specified period and even closing out the contract to overcome emergency situations are taken.