Futures - what is it? How is futures trading done?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Russian traders are accustomed to using such a tool as futures in their activities. RTS, MICEX and other exchanges make it possible to do this in relation to a wide range of financial transactions. What are the features of the implementation of the relevant trading strategies? What are futures and how do they help traders make money?

What are futures

According to the generally accepted definition among traders, futures are financial instruments that allow the implementation of futures contracts on the underlying asset, which imply an agreement between the buyer and seller on the price and terms of the transaction. In turn, other aspects of this asset, such as, for example, quantity, color, volume, etc., are negotiated in separate specifications of the agreement. Futures are a fairly universal financial instrument. They can be adapted to a variety of trading areas.

Futures are derivatives?

Yes, this is their variety. The term "derivative" is understood by many traders as a synonym for the phrase "derivative financial instrument", that is, one that is complementary to classic purchase and sale transactions. Derivative and futures is a written agreement that defines the terms of the contract for the seller and the buyer. The specificity of any derivative is that, in fact, it itself can be the subject of a sale and purchase agreement. That is, there may not be a real transfer of goods from the supplier to the buyer.

Futures History

To study the essence of futures in sufficient detail, it will be useful to know how these financial instruments appeared, what are the main historical stages of their introduction into financial circulation. Some traders believe that the mechanism of the relationship between the seller and the buyer, which today fits the definition of futures, appeared long before the instrument in question appeared on the market. As is often the case in economics, first a phenomenon appeared, and then a term that characterizes it.

The market demanded innovations

One of the main types of goods has always been grain. If we talk about the period until the end of the 19th - beginning of the 20th century, then it was at all among the key items of world trade. The farmers who grew the cereals shipped them to their customers by land or sea. There was often an oversupply of goods on the grain market in the autumn - farmers tried to sell their crops as soon as possible. In turn, in the spring there could be a shortage of grain, which simply did not have time to grow, while what was not sold had time to deteriorate even in the fall, since there was often nowhere to store it. The market somehow needed to resolve this imbalance. This is how term financial instruments appeared, which allowed grain farmers, as well as suppliers of any other goodsagricultural type, to conclude contracts with buyers even before the cereals had time to ripen or arrive at the point of sale.

Multipurpose Tool

Those agreements became known as forward agreements. Futures are, one might say, an adaptation of a forward contract to the peculiarities of trading on the stock exchange. Experts associate their appearance with the established transaction standards in business, thanks to which the relevant agreements can be concluded regardless of the type of goods being sold. As a result, futures trading has spread to transactions in which not only grain and other agricultural products are sold and bought, but also raw materials, metals, some prepared food products: sugar, coffee, etc. To a relatively new one, if we talk about the history of commodity relations, financial exchanges have also adapted to the instrument.

From commodities to stock indices

There is evidence that the first futures trading in trading was carried out on the Dow Jones exchange for transactions on the index of the same name. As a result, financiers got an excellent tool for insuring financial risks - just like grain suppliers could do in the autumn. Over time, index futures have become so common that trading volumes have sometimes outpaced those of classic trades.

Forex futures

The new financial instrument also began to penetrate the foreign exchange markets. One of the factors of traders' interest in using futures was,according to some experts, the abolition of the "gold standard" in the United States in 1971. Immediately after the introduction of new norms, quotes on the world currency market began to fluctuate strongly. Traders suggested that futures are the very tool that will help the market get through the high volatility phase.

Appropriate trading mechanisms were put in place, and due to their rapid growth in popularity, experts assumed that this was exactly what the market demanded. Futures for the dollar and the ruble, as noted in a number of sources, was first concluded in April 1998. On the first day of trading, the total amount of contracts exceeded 200 million rubles.

Futures in Russia

By the way, the history of Russian exchange trading dates back to the time of Peter the Great. And at the beginning of the 20th century, according to some data, 87 commodity exchanges functioned in Russia. From the end of the 1920s to 1991, this institution of trade did not function in our country. But after Russia's transition to a free market, it became one of the key ones for the country's economy.

When did the first transactions with futures begin to take place in Russia? There is evidence that the first precedents for the use of this financial instrument were recorded in 1996 on the St. Petersburg Stock Exchange. The first analytical articles began to appear, in which theses were put forward about the prospects of using futures in Russian trading. In the 1990s, contracts on state and municipal bonds began to be executed through this financial instrument.

Futures (RTS and MICEX) are now applicable on both major Russian stock exchanges. The first one even has a specialized segment for trading with this financial instrument - FORTS. Futures and options are available on FORTS (another popular way to enter into contracts). It will be useful, by the way, to consider their differences.

What is the difference between futures and options

The key criterion for distinguishing futures from options is that the owner of the former must fulfill the terms of the agreement. In turn, the second financial instrument allows the party to the transaction not to fulfill the conditions specified in the contract. For example, do not sell shares if they have fallen in price compared to the price at the time of their purchase.

Types of futures. Staged

However, let's continue the study of futures. Modern traders classify them into two types. First, there are so-called staged futures. They represent a contract, at the time of execution of which the buyer undertakes to acquire, and the seller - to cede the amount of some asset specified in the transaction specification. In this case, the futures price will be the one that was fixed at the most recent auction. If the contract expires and the seller does not cede the asset, he may face pen alties.

Settlement

There are also settled futures. Their peculiarity is that the seller and the buyer settle between themselves in the amounts that make up the difference between the price of the asset at the time of signing and execution of the agreement, regardless of its actual delivery.

Futures specification structure

Oneone of the key elements of futures transactions is the specification. It is a source in which the basic terms of the contract are fixed. The structure of the specifications of transactions of the type under consideration is usually as follows: the name of the agreement, its specific type - settlement or staged, the value of the underlying asset, terms, as well as some speculative parameters are indicated. Among the key ones, one can name a tick, or a minimum price change step.

Its values depend on the particular asset. For wheat, if we talk about the main world exchanges, this is about 5 cents per ton. Knowing what the volume of the futures contract is, a trader can easily calculate the total price change for the entire amount of the asset. For example, if there is an agreement for 200 tons of wheat, then you can calculate that the minimum price adjustment will be $10.

Oil Futures

How do you trade, say, Brent and other oil futures? Very simple. On modern commodity exchanges, the indicated grade of oil is traded, as well as two more - Light Sweet and WTI. All of them are called marker ones, since other grades of oil are valued based on their correlation with the value of those traded. Contracts for black gold are executed on two main exchanges - NYMEX, in New York, and ICE, in London. On the American one, Light Sweet oil is traded, on the English one - two other grades. The peculiarities of black gold trading are that they are round-the-clock.

A common guideline forTraders of the planet favor the Brent variety. This oil is a marker for a significant part of the world's black gold grades, including Russian Urals oil. True, as some analysts note, there are activists among traders who do not consider it expedient to hold Brent as a benchmark. The main reason is that it is mined mainly only in the North Sea, in Norwegian deposits. Their stocks are declining, as a result of which, as some analysts believe, the liquidity of the commodity is decreasing, and the price of oil may not reflect real market trends.

Brent futures can be easily recognized by the abbreviation BRN of the London ICE exchange. The full name of the contract sounds like Brent Crude Oil. Oil is supplied under contracts on a monthly basis. Accordingly, transactions can be concluded at an interval of a month. The maximum contract duration is 8 years. There are short-term oil futures and there are long-term ones. The value of the corresponding contract is 1,000 barrels. The value of 1 tick is a cent, that is, the minimum change in the contract price is $10.

How to win in oil trading using futures? Oil quotes, according to some economists, depend on the state of affairs in the global economy. If a person is well versed in this topic, then he can try to enter into a contract to buy or sell oil at a set price, thus opening a long or short position, respectively. Let's say, at the cost of oil at $80 per barrel, a person assumes that in 3 months the raw material will rise to $120. He enters into 1 minimum purchase contractblack gold at a price of $90 per barrel. Comes 3 months. Oil, as expected, rises in price to $120 per barrel, and at the disposal of the trader it turns out to be at a price of $90. According to the terms of the exchange, the prescribed difference of $40 is immediately accrued to him.

Futures and currencies

Obviously, in order to trade with oil futures, a trader will need significant financial investments. The minimum contract size, as we have already noted, is 1 thousand barrels, that is, if we take the current, not the highest prices for black gold, investments of about 50 thousand dollars will be required. However, a trader has the opportunity to earn by entering into a futures contract for the dollar, on the MICEX, for example. According to the terms of the exchange, the minimum contract size is $1,000. Tick - 10 kopecks.

For example, a person assumes that the US dollar will fall from the current 65 rubles to 40. He opens a long position to sell one contract at a price of, say, 50 dollars, the term is 1 month. A month later, the ruble really strengthens its positions - up to 40 units per US dollar. A person, on the other hand, has the right to sell the amount specified in the contract specification at a rate of 50 dollars and gain 10 rubles from each unit of American currency from the exchange rate difference. But if he does not guess with the course, he will have to fulfill his obligations to the exchange one way or another. This usually happens by placing a deposit of the required size on the account of the trading platform.

Similar earnings mechanisms are possible when trading shares of enterprises. When weighed,With a qualified analysis of the state of affairs in the market, a trader can count on excellent earnings through futures. Trading on modern exchanges is sufficiently comfortable, transparent and protected by Russian law. As a rule, a trader has convenient analytical tools at his disposal, for example, a futures chart for a selected asset. The use of an appropriate financial mechanism among Russian financiers has become quite popular.