--- title: "Why derivatives exist: forwards, futures and options" description: "Forwards, futures and options as one story, with a dated Nifty future and call from 10 to 29 Jun 2026 and the history of F&O in India." source_url: "https://www.rupeecase.com/learn/path-12/module-12-1-why-derivatives-exist" --- [Path 12 1 of 9](/learn/path-12/)Why derivatives exist: forwards, futures and options in one story[Next 12.2](/learn/path-12/module-12-2-india-fo-market-map) On Wednesday 10 Jun 2026 the Nifty 50 closed at 23,214.95. The June Nifty future, a contract that settles on 30 Jun, settled that day at 23,240.10. One index, two prices, 25.15 points apart. A buyer of that future fixed the June price that afternoon. By Monday 29 Jun, the day before expiry, the future was at 23,972.90. Fixing a price today for a trade later is the oldest idea in markets, and it is all a derivative is. When I explain F&O to a friend I start with one question: who needs the price fixed, and who is happy to carry the risk? This lesson asks it three times, as a forward, a future and an option. 3By the end you can 1. Tell the story of a forward, a future and an option as three answers to one question. 2. Say what an exchange and a clearing corporation add to a plain promise. 3. Read the payoff of a bought future and a bought call from one dated Nifty move. ## The idea, plainly ### A forward: a promise between two people Take a mango grower. In March she expects a crop in June and fears prices will fall by then. A fruit trader fears the opposite. They agree a price per crate today, for delivery on a fixed day in June. That is a forward. SEBI's investor page tells the same story with a farmer and a merchant. Both sides have swapped an unknown price for a known one. Read one more paragraph, 44 words The weak point is trust. If prices jump, the grower is tempted to sell to someone else. If they fall, the trader is tempted to walk away. And a forward is made to order, so neither side can hand it to a third person. ### A future: the same promise with a referee A future fixes the weak point in three steps. The terms are standard: the same index, the same lot, the same expiry date for everyone. An exchange lists the contract, so buyers and sellers meet on a screen. And a clearing corporation steps in after the trade. NSE Clearing becomes the counterparty to the buyer and to the seller, takes margin from both and settles gains and losses every day. Neither side has to trust the other. A Nifty future needs no mangoes either: at expiry it settles in cash against the index. Each step adds one thing: first a referee, then a right A forward needs trust between two people. A future standardises the promise and puts a clearing corporation in the middle. An option lets the buyer walk away for the price of the premium. Source: SEBI Investor, Understanding derivatives; NSE Clearing, clearing mechanism. As of 16 Oct 2026. ### An option: the right without the duty An option changes one more thing. Think of the token amount you pay to hold a flat or a car at today's price. You may walk away and lose only the token. If prices rise, your locked price is worth something. An option works like that token, and the token is called the premium. A call gives the right to buy at a fixed price, the strike. A put gives the right to sell. The seller of the option keeps the premium and takes on the duty if the buyer uses the right. Modules [F11](/learn/path-14/module-14-1-call-option-explained) and [F12](/learn/path-14/module-14-2-put-option-explained) take calls and puts one at a time. ### Why anyone trades them SEBI names three uses: hedging, speculation and arbitrage. A hedger removes a price risk. A speculator takes a view on direction with less money than the shares need. An arbitrageur trades the gap between cash and futures prices, and SEBI notes those profits are mostly small. The same page adds a fact to carry through every lesson here: derivatives are a zero sum game. Before costs, one party's profit is another's loss. India came to this late and carefully. A SEBI committee reported in March 1998, Parliament changed the law in December 1999, and the first Nifty future traded on 12 Jun 2000. From the committee report to the first Nifty future took a little over two years 1. 17 Mar 1998**Committee reports**SEBI's committee under L. C. Gupta recommends derivatives, starting with index futures. 2. Dec 1999**Law changed**Parliament amends the securities law so that derivatives count as securities. 3. 12 Jun 2000**Nifty futures start**NSE lists index futures on the Nifty 50. 4. 4 Jun 2001**Nifty options start**Index options follow, on the same index. 5. 2 Jul and 9 Nov 2001**Stock options, then stock futures**Contracts on single shares come in the same year. 6. 20 Nov 2024**Bigger contracts**Larger lots, and one weekly index per exchange, under SEBI's rules of 1 Oct 2024. Index options followed futures by a year, and stock options and futures came in the same year as index options. The 2024 line is the rule that has set lot sizes since then. Source: NSE, About equity derivatives; NSE, Indian Securities Market Review 1999; SEBI circular of 1 Oct 2024. As of 16 Oct 2026. 2 terms this section turns on From the module glossary; every term is in the Learn glossary too. Source: Module 12.1, Why derivatives exist: forwards, futures and options in one story. ## Worked example: one Nifty lot, 10 to 29 Jun 2026 A Nifty lot is 65 units. On 10 Jun 2026 the June future settled at 23,240.10, so one lot was worth Rs 15.11 lakh. Take a buyer of one lot at that settlement price, and a buyer of one lot of the 23,300 call at its premium of Rs 294.60 a unit. Both close on Monday 29 Jun, the day before expiry, at that day's settlement prices. Charges are left out, and a real fill would differ from a settlement price by at least a tick. | Step | What we read | Value | | --- | --- | --- | | 1 | Nifty 50 close, 10 Jun | 23,214.95 | | 2 | June future, settlement price, 10 Jun | 23,240.10 | | 3 | Gap between future and index, points | 25.15 | | 4 | Value of one lot of the future (65 units), Rs | 15.11 lakh | | 5 | Nifty 50 close, 29 Jun | 23,946.25 | | 6 | June future, settlement price, 29 Jun | 23,972.90 | | 7 | Buyer of the future, per lot: (23,972.90 less 23,240.10) x 65 | Rs 47,632 | | 8 | Seller of the future, per lot, the same amount reversed | −Rs 47,632 | | 9 | 23,300 call, premium per unit, 10 Jun | 294.60 | | 10 | Same call, settlement price, 29 Jun | 668.40 | | 11 | Buyer of the call, per lot: (668.40 less 294.60) x 65 | Rs 24,297 | A future gains and loses point for point, with no floor One lot of the June future bought at its settlement price of 23,240.10 on 10 Jun 2026. Each point on the index is worth one rupee for each of the 65 units. Source: NSE end of day data, computed by RupeeCase. As of 10 Jun 2026. A bought call risks only its premium and gains past the strike plus the premium One lot of the 23,300 call bought at Rs 294.60 a unit, which is Rs 19,149 for 65 units. Below the strike the loss is flat. Source: NSE end of day data, computed by RupeeCase. As of 10 Jun 2026. Read 3 more paragraphs, 244 words The index rose 3.2%, or 731.30 points. The future gained 732.80 points, a shade more than the index, because the gap between future and index moved from 25.15 to 26.65 points. The call gained 373.80 a unit on a premium of 294.60, which is the lever people feel when they buy options: a small price, a big percentage swing. Now run it the other way. Suppose the future had fallen by the same 732.80 points instead. Its buyer would have lost Rs 47,632, the exact mirror, and its seller would have gained it. The buyer of the call would have lost almost all of the premium of Rs 19,149 and never more, because the index would have sat far below the strike with one day left. That is the whole difference in shape: a future pays and costs point for point, while a bought call has a floor on the loss and pays only past the strike plus the premium. One path proves nothing. A flat month would have left the future near zero and the call worth less than its price. Held to the end, both June contracts would have settled in cash against the index close of 30 Jun 2026, which is the rule for expiries before 7 Dec 2026. [Module F04](/learn/path-12/module-12-4-contract-specs-lots-and-expiries) has the date and the change after it. [Module F07](/learn/path-13/module-13-1-futures-basics-mark-to-market) shows how the margin and the daily settlement worked on each day from 10 to 29 Jun. ## The common mistake The belief: The future trades above the index because the market expects the index to rise. The gap looks like a forecast, so it gets read like one. Test it on this chain. The gap on 10 Jun was 25.15 points. Interest on the index level for 20 days would alone have put the future 65 points above it, and the dividends the index companies are expected to pay take part of that back. The gap is a price for waiting, not a vote on direction. It also shrinks to nothing by expiry, whatever the index does. [Module F08](/learn/path-13/module-13-2-futures-basis-and-carry) takes it apart. ## Key takeaways * A forward is a private promise. A future is the same promise on an exchange. * A clearing corporation stands between buyer and seller, so neither has to trust the other. * A future pays point for point. A bought option risks only its premium. * Before costs, derivatives are zero sum: one side's gain is the other's loss. * A future's gap to the index is a price for waiting, not a forecast. Watch in the terminal: which numbers am I looking at? A short tutorial on sample data. **Before you trade.** Derivatives trading carries a high risk of loss. SEBI's study "Profitability of Individual Traders in the Equity Derivatives Segment (FY25 to FY26)" (August 2026) found that 87.7% of individual traders in equity F&O made net losses in FY26, with aggregate net losses of Rs 91,685 crore. [Read the SEBI study](https://www.sebi.gov.in/reports-and-statistics/research/aug-2026/study-profitability-of-individual-traders-in-the-equity-derivatives-segment-fy25-fy26-_103835.html) What does Why derivatives exist: forwards, futures and options in one story cover?A price fixed today for a trade later. Three versions of the same promise, and what each one adds. It works through The idea, plainly, Worked example: one Nifty lot, 10 to 29 Jun 2026, The common mistake, Key takeaways. It is module 12.1 of Path 12, Derivatives Basics and Rules, about 8 minutes of reading, free. TTry it ## Payoff builder, on the same example. Legs from a dated chain, the expiry and before expiry curves, breakevens and the charges. Dated NSE end of day data, nothing live, no orders. **Payoff builder**, Nifty, 10 Jun 2026, 30 Jun 2026 expiry. [Open the payoff builder](/learn/tools/payoff-builder?chain=NIFTY_2026-06-10_2026-06-30&preset=long-future) AF&O on RupeeCase ## Hedging only, in development F&O at RupeeCase will do one job: protect a portfolio you already own, by a rule published before it runs. No speculation, no naked option selling, no leveraged bets. It is not available yet. [How hedging will work](/hedging)[Sign up for RupeeCase](https://invest.rupeecase.com/signup) [No hedgeFalls with the marketWith a putA floor, for a premiumIllustration with made up numbers, not a product and not a recommendation.](/hedging) QQuick check ## 10 questions, 7 to pass. Each attempt draws 10 of the 15 questions in this module's bank, and a retake draws a fresh set. A pass gives this module's Certificate of Completion. Your result stays on this device and counts towards the Path 12 certificate. 7 of 10 correct passes module 12.1 Every answer is explained when you check; a retake is always free. Source: RupeeCase Learn quiz rules (70% to pass). Passed ### Certificate ID Download PNGPrint or save as PDF[Check the ID](/learn/certificates/verify) Self paced and unproctored. A record of completing free education by RupeeCase; not a NISM certificate and not endorsed by NISM, NSE, BSE or SEBI. It qualifies no one to deal, advise or publish research. CCheck yourself ## Path 12 so far. Your quick check results on this device, stop by stop. Stop 1 of 9 on Path 12 Derivatives Basics and Rules: every live stop, this module ringed. Source: RupeeCase Learn, Path 12. 1. [12.1Why derivatives exist: forwards, futures and options in one storyNot yet](/learn/path-12/module-12-1-why-derivatives-exist#quiz) 2. [12.2India's F&O market map: exchanges, clearing, SEBI and who tradesNot yet](/learn/path-12/module-12-2-india-fo-market-map) 3. [12.3Read SEBI's loss studies before your first tradeNot yet](/learn/path-12/module-12-3-sebi-fo-loss-studies) 4. [12.4Contract specs that matter now: lots, expiry days, strikes and settlementNot yet](/learn/path-12/module-12-4-contract-specs-lots-and-expiries) 5. [12.5Margins without jargon: SPAN, exposure, expiry day margin and upfront premiumNot yet](/learn/path-12/module-12-5-fo-margins-explained) 6. [12.6The real cost of a trade: STT, exchange fees, SEBI fee, GST and stamp dutyNot yet](/learn/path-12/module-12-6-cost-of-an-fo-trade) 7. [12.7Position sizing and risk of ruin for F&O beginnersNot yet](/learn/path-12/module-12-7-position-sizing-and-risk-of-ruin) 8. [12.8Red flags in F&O: tip groups, too good claims and registration checksNot yet](/learn/path-12/module-12-8-fo-red-flags) 9. [12.9Behaviour in F&O: loss chasing and what SEBI's behaviour study foundNot yet](/learn/path-12/module-12-9-fo-trading-behaviour) 10. [TPath test, 30 questionsNot yet](/learn/path-12/module-12-9-fo-trading-behaviour#pathTestSection) Path 12 in reading time: 72 minutes over 9 modules Minutes of reading per module, this one in amber. Source: RupeeCase Learn, Path 12. Explore next ## Put the module to work. * [Free module 14.3Buyer or seller: payoffs, margin, win rate and expectancy9 min read](/learn/path-14/module-14-3-option-buyer-vs-seller) * [Free module 12.2India's F&O market map: exchanges, clearing, SEBI and who trades8 min read](/learn/path-12/module-12-2-india-fo-market-map) * [Free module 13.1Futures explained: long, short, leverage and daily mark to market8 min read](/learn/path-13/module-13-1-futures-basics-mark-to-market) * [Free module 14.1The call option, told as a story8 min read](/learn/path-14/module-14-1-call-option-explained) * [QuestionWhat are futures and options (F&O kya hai)?A short answer with a dated chart](/learn/questions/what-are-futures-and-options) * [Path 12Basics and rules9 modules live, 0 coming next](/learn/path-12/) Community ## Join my WhatsApp group. Scan the code, fillFill one short form, and join my WhatsApp group. Slides, sources, factsheets and the rebalance logs live there, and members join a daily Google Meet with me. New to RupeeCase? [Getting started](/getting-started) [See the terminal](/terminal) [Sign up for RupeeCase](https://invest.rupeecase.com/signup) [Join the WhatsApp group](https://forms.gle/C6HMtM1Z2GfeocQV7) [One form, one group](https://forms.gle/C6HMtM1Z2GfeocQV7)Scan with your phone camera SSources ## Go to the source. 6 sources, NSE the most cited The publisher of each source listed below. Source: Module 12.1 source list. 1. [SEBI Investor, Understanding derivatives](https://investor.sebi.gov.in/understanding_derivatives.html) SEBI 2. [NSE, About equity derivatives (launch dates of index and stock contracts)](https://www.nseindia.com/static/products-services/about-equity-derivatives) NSE 3. [NSE, Indian Securities Market Review 1999, chapter 8: developments in derivatives in India (Gupta committee, 1999 law change)](https://nsearchives.nseindia.com/web/sites/default/files/inline-files/ismr1999ch8.pdf) NSE 4. [NSE Clearing, Clearing mechanism for equity derivatives](https://www.nseclearing.in/clearing-settlement/equity-derivatives/clearing-mechanism) NSE 5. [SEBI, FAQ on equity and currency derivatives](https://www.sebi.gov.in/sebi_data/faqfiles/jan-2017/1485846339758.pdf) SEBI 6. Hull, J., Options, Futures, and Other Derivatives, Pearson (introduction, and the chapters on futures and on the mechanics of options markets) Book GTerms ## 6 terms from this module. Forward contractA private agreement to trade at a price fixed today on a later date. It is made to order and carries the risk that one side walks away. Futures contractA standard forward traded on an exchange, with a clearing corporation in the middle and margin settled every day. OptionA contract that gives the buyer the right, not the duty, to buy or sell at a fixed price. The seller takes on the duty. PremiumThe price of an option. The buyer pays it and the seller receives it. Clearing corporationThe body that becomes the counterparty to both sides of a trade, collects margin and settles gains and losses. For NSE it is NSE Clearing. Cash settlementSettling a contract in rupees at expiry instead of delivering the underlying. Index contracts settle this way. [All 230 terms in the glossary](/learn/glossary) [Question people askWhat are futures and options (F&O kya hai)?A short answer with a dated chart](/learn/questions/what-are-futures-and-options)[Related module12.2 India's F&O market map: exchanges, clearing, SEBI and who trades8 min, Beginner](/learn/path-12/module-12-2-india-fo-market-map)[Related module13.1 Futures explained: long, short, leverage and daily mark to market8 min, Beginner](/learn/path-13/module-13-1-futures-basics-mark-to-market)[Pillar guideDerivatives and Quant115 modules across paths 12 to 19](/learn/derivatives) Education only, not investment advice, a research report or a recommendation to buy, sell or hold any security. RupeeCase (QC Alpha Technologies Pvt Ltd) is not registered with SEBI as an investment adviser or research analyst. Contracts and prices shown are for illustration only, come from NSE end of day files at least 30 days old, and are not recommendatory. Derivatives trading carries a high risk of loss.