A Futures contract is a standardized contract to buy or sell a specific security at a future date at an agreed price. Thus a SENSEX® future is a future on the index i.e. the underlying is the index itself. There is no underlying security or a stock, which is to be delivered to fulfill the obligations as SENSEX® futures is cash settled. As with other derivatives, the contract derives its value from the underlying index.

The main factor that differentiates the SENSEX® from other indices in the country is that it employs “Free Float Market Capitalisation” methodology. Essentially free float means the shares that are available for investors to trade in, are only considered for reckoning market capitalsiation. Thus those shares that are not available for trading on a day-to-day basis are excluded from the calulation for market capitalisation. These exclusions are given under :

• Holdings by founders/directors/ acquirers which has control element / persons/ bodies with "Controlling Interest"
• Government holding as promoter/acquirer
• Holdings through the FDI Route / Strategic stakes by inds.
• Equity held by associate/group companies (cross-holdings)
• Equity held by Employee Welfare Trusts
• Locked-in shares

Thus it is clear that an index based on free float is more accurate and indicative of the actual trend and also removes the sector bias that may creep in on account of the "full market capitalisation" model.