A fund receives Rs 200 crore at 3 pm that it cannot invest in stocks before the close. How does it equitise with index futures at 22,000, lot 50, and what does it save if the index rises 1.5% overnight?

Buy 1,818 contracts; they avoid a shortfall of about Rs 3 crore on a 1.5% rise. One contract covers 50 units at 22,000, Rs 11 lakh, and Rs 200 crore divided by that is 1818.2, rounded down to 1,818. A 1.5% rise is 330 points, and 1,818 contracts times 50 times 330 is Rs 3.00 crore, almost exactly what Rs 200 crore of idle cash would have missed. The fund needs margin, a broker line and a plan to unwind as it buys stock.

Time. A family that has agreed to buy a house but cannot complete for a month sometimes asks the seller to fix the price today; a futures contract does the same for an index. EquitisationUsing index futures to give cash the return of the equity market until the cash can be invested in the underlying shares. replaces the fifty stock purchases with one trade whose value moves with the index, so the Rs 200 crore behaves like invested money from 3.15 pm onward. The fund is not speculating; its mandate already says the money should be in the index, and the futures put it there faster than the cash desk can.

One contract is 50 index units, so at 22,000 it carries Rs 1,100,000 of exposure. Rs 200 crore divided by Rs 11 lakh is 1818.18. Buy 1,818 contracts, covering Rs 199.98 crore, and leave the odd Rs 2 lakh in cash; rounding up would put the fund slightly long the index with money it does not have, and a fraction of a contract cannot be traded anyway.

Three practical things, and interviewers at asset managers ask about all of them. Initial margin: the clearing corporation sets it, and the fund must confirm the current level, but illustratively at 10% of notional that is about Rs 20 crore of the Rs 200 crore parked with the broker rather than earning overnight interest. Variation margin: if the index had fallen 1.5% instead, the fund would pay out Rs 3.00 crore the next morning, which is the same loss the stocks would have shown, just settled in cash a day earlier. And the unwind: as the dealing desk buys each basket of stock on day two, it sells the matching number of contracts, so exposure never doubles. The futures gain is not extra return; it is the index return the cash would otherwise have missed, and the regulation on how much of a fund's assets can sit in derivatives is a figure to confirm with the current rules, not to recall from memory.

Say the limitation. Futures track the index through the basis, and if the futures are expensive to spot at 3.15 pm the fund pays a little of the gain away when it unwinds. Over one night that is small; over a week of slow stock buying it can matter.