Futures Trading in NEPSE: Everything You Need to Know

What is a Futures Contract?

A futures contract is a legally binding agreement to buy or sell a specific asset (stock, index, commodity) at a predetermined price on a specified future date. Unlike buying stocks outright, futures allow traders to control a large position with a relatively small amount of capital (margin).

Contract Value = Futures Price × Contract Size (lot size)
Margin Required = Contract Value × Margin Rate (%)
Leverage = Contract Value / Margin Required

Key Characteristics of Futures

Leverage: Control large positions with small capital — amplifies both gains and losses
Obligation: Unlike options, both buyer and seller are obligated to fulfill the contract at expiry
Daily Mark-to-Market: Profits and losses are credited/debited daily (not at expiry)
Expiry date: Contracts expire on a fixed date — positions must be closed or rolled

NEPSE's Derivatives Market: Current Status

Nepal's derivatives market is in an early but exciting phase of development. The Nepal Stock Exchange (NEPSE) and Securities Board of Nepal (SEBON) have been progressively building the regulatory infrastructure for derivatives trading.

🇳🇵 NEPSE Derivatives Update: As of 2024, SEBON has approved the framework for index-based futures contracts on NEPSE. Traders are advised to confirm the current availability and specifications of derivatives products directly with their broker, as Nepal's derivatives market is actively evolving with new products being introduced.

Types of Futures Contracts Expected in NEPSE

Index Futures: NEPSE Index futures allow traders to speculate on or hedge against broad market movements
Stock Futures: Single-stock futures on select large-cap NEPSE companies (banking, hydropower, insurance sectors)
Sector Futures: Sector-based contracts for banking index, hydropower index, etc.

How Futures Trading Works: A NEPSE Example

Going Long on a NEPSE Index Future

Suppose the NEPSE Index is at 2,500 and you expect it to rise to 2,700 over the next month. You buy one NEPSE Index futures contract:

Contract Size: 10 units of NEPSE Index
Contract Value: 2,500 × 10 = NPR 25,000
Margin Required (10%): NPR 2,500

If NEPSE rises to 2,700:
Profit = (2,700 − 2,500) × 10 = NPR 2,000
Return on Margin = 2,000 / 2,500 = 80% (vs 8% on spot)

Going Short on a NEPSE Index Future

Conversely, if you expect the market to fall, you can sell (short) a futures contract — unlike the spot market where short selling is restricted. This is one of the key advantages of futures for NEPSE traders:

Sell 1 NEPSE Index Future at 2,500
If NEPSE falls to 2,300:
Profit = (2,500 − 2,300) × 10 = NPR 2,000
Return on Margin = 2,000 / 2,500 = 80%
(But if NEPSE rises to 2,700, Loss = NPR 2,000)

⚠️ Leverage Warning: Futures leverage amplifies both gains AND losses. A 10% adverse move can wipe out your entire margin. Never risk money you cannot afford to lose, and always use stop-loss orders in futures trading.

Margin in Futures Trading

Futures require two types of margin:

Initial Margin: The upfront deposit required to open a futures position (typically 5–15% of contract value in Nepal's context)
Maintenance Margin: The minimum margin required to keep a position open. If losses reduce your account below this level, you receive a margin call — you must deposit more funds or the position is closed automatically

Daily Mark-to-Market (MTM)

Every trading day, your futures positions are marked to the closing price. If the market moved against you, the loss is deducted from your margin account that evening. If it moved in your favor, the profit is credited. This daily settlement prevents large accumulated losses — unlike spot market positions where you can hold indefinitely.

Hedging with NEPSE Futures

One of the most valuable uses of futures for NEPSE investors is hedging — protecting an existing portfolio from market decline without selling your shares.

Portfolio Hedge Example

Suppose you hold a NPR 500,000 NEPSE stock portfolio and are worried about short-term market weakness (e.g., budget announcement uncertainty). You can hedge by shorting NEPSE Index futures:

Portfolio Value: NPR 500,000
Portfolio Beta (vs NEPSE): 1.2 (more volatile than index)
Hedge Ratio: 500,000 × 1.2 = NPR 600,000 worth of futures to short

If NEPSE drops 10%:
Portfolio Loss ≈ NPR 60,000 (12% × 500,000)
Futures Gain ≈ NPR 60,000
Net Loss ≈ 0 (fully hedged)

Futures Pricing: Contango and Backwardation

Futures prices are not the same as spot prices. The difference is called the basis:

Contango: Futures price > Spot price (normal in most markets; reflects cost of carry)
Backwardation: Futures price < Spot price (indicates strong near-term demand or supply shortage)

In NEPSE, strong contango on index futures often indicates a bullish market sentiment — traders are willing to pay a premium for future delivery. Backwardation can signal extreme near-term buying pressure or a supply shortage in shares.

AI Signals for Futures Trading

ASHVA Tech's LSTM models are well-suited for futures signal generation because:

Futures require precise entry/exit timing — our confidence scores help identify high-probability entry windows
LSTM models can predict short-term NEPSE Index direction with high accuracy — directly applicable to index futures
Volatility prediction from our models helps set appropriate stop-loss widths for leveraged futures positions
The AI adjusts signal thresholds for futures based on current market regime — more conservative during high-VIX periods

Navigate Futures with AI Intelligence

ASHVA Tech's signals include futures-specific recommendations with precise entry levels, target zones, and stop-loss placement.

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