2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16
A large number of different financial instruments are involved in trading on the stock exchange. One of them, and a very popular one at that, is the futures contract. What is it and what are its features - this is exactly what will be discussed in our article.
Essence and concept
"Future" - translated from English means "future" or "future". A futures contract (sometimes simply referred to as a futures contract) is an agreement to sell or purchase a product specified in this contract on a specific date and at a pre-agreed price. The role of such a product can be stocks, currency, or just some product. The futures contract as a type appeared because both producers and buyers wanted to hedge against an unfavorable increase or decrease in prices in the metals, energy or grain business. Later, as it developed, this type of transaction began to spread to other types of trading instruments. In particular, it began to be concluded onstock indices, interest rates, currencies, etc. Currently, the world's largest futures exchanges operate, where the lion's share of trading in this instrument takes place. The most famous of these sites are the Chicago Board of Trade, NYMEX (New York), LIFFE (London), FORTS (RTS section).
How is a futures contract different from a forward contract
You can buy goods in the future at a previously agreed value using another tool. This is a forward contract. It is also quite popular and is often used to hedge risks. Often novice investors confuse forward and futures contracts, and therefore we will point out their main differences:
- Futures are traded only on an organized exchange.
- Forwards are binding and are usually entered into for the purpose of actually delivering the goods.
- Futures have high liquidity and can be liquidated by concluding a reverse (opposite) trade.
Longs and shorts
When it comes to buying a contract, it means going long or going long. In this case, the buyer assumes the obligation to accept a certain primary asset from the exchange and, upon the expiration of the contract, pay the exchange the amount specified in it. Short is the reverse operation. When a futures contract is “sold”, the supplier undertakes to sell (deliver) a certain asset to the exchange when the contract is due, for which the exchange will transfer the appropriate amount of money to him according to the price,specified in this contract. In both cases, there is no need to worry about the fulfillment of obligations - this is monitored by the clearing house. Thus, it is not at all necessary for an investor to check the financial position of the counterparty.
Basic conditions
In order to conclude a futures contract, it is necessary to deposit a certain collateral on the company's brokerage account. This amount is called initial margin, and the account into which it is deposited is known as a margin account. Its minimum size is set by the clearing house, guided by the accumulated statistics and taking into account the maximum daily deviations in the value of the asset. The brokerage company may also require the investor to deposit a larger amount of margin. In addition, the client must have a futures account, which must contain at least 65% of the initial margin. If this condition is not met, the broker will notify the investor of the need to deposit additional funds to reach the level of the initial (variation) margin. Also, if this requirement is missed, the broker has the right to liquidate such a futures contract using the opposite operation at the expense of the client. Every day at the end of the trading session, the clearing house recalculates all open positions: the amount of winnings is credited to the account of successful investors from the account of those who lost. Also, the positions of the parties are corrected or their total number is limited.
Recommended:
Contract with IP for the provision of services: sample. Contents of the contract, terms
In the process of concluding contracts, many questions arise: what form should the agreement be, what mandatory conditions should it contain, is there a standard sample that can be taken as an example? We will tell you how to draw up this document correctly so that all future obligations are fulfilled properly and on time, and the parties have legal protection
Expiration of futures. How to properly manage a position?
Newcomers to trading enter a new, unknown world with its own rules and laws. A huge amount of incomprehensible information, terms, models will make even scientists confused. Any strategy in the market is to anticipate future or frequently recurring events and capitalize on it. Today we’ll talk about what futures expiration is and how you can increase your investments on it
Futures - what is it? How is futures trading done?
Futures are one of the most common tools for currency and exchange trading. What are its features?
What are Brent and Urals oil futures. Oil futures trading
Oil futures are contracts that detail all the conditions for buying or selling a commodity. Trading futures with the ability to predict price movements can bring good income
Jack D. Schwager - futures and hedge fund expert: biography, books
Today's article is about Jack Schwager. This is a writer and a successful trader who built his career and showed everyone that it is possible to achieve any heights. We will look at the biography of the expert, we will also talk about his books and tips for beginners
