Futures

● Futures Market
● Characteristics of Futures Market
Futures
 What are Futures ?
Futures are derivative financial contracts that
obligate the parties to transact an asset at a
pre-determined future date and price. Here, the
buyer must purchase or the seller must sell the
underlying asset at the set price, regardless of
the current market price at the expiration date.
 Futures Exchange
Underlying assets include physical commodities
or other financial instruments. Futures contracts
detail the quantity of the underlying asset and are
standardized to facilitate trading on a futures
exchange. Futures can be used for hedging or
trade speculation.
 Futures - explained
Futures—also called futures contracts—allow traders
to lock in a price of the underlying asset or commodity.
These contracts have expirations dates and set prices
that are known up front. Futures are identified by their
expiration month. For example, a December gold
futures contract expires in December. The term futures
tend to represent the overall market.
 Types of Futures Contact
However, there are many types of futures
contracts available for trading including:
● Commodity futures such as in crude oil,
natural gas, corn, and wheat.
● Stock index futures such as the S&P 500
Index.
● Currency futures including those for the
euro and the British pound.
● Precious metal futures for gold and silver.
● U.S. Treasury futures for bonds and other
products.
 Options vs Futures
It's important to note the distinction between
options and futures. Options contracts give the
holder the right to buy or sell the underlying asset
at expiration, while the holder of a futures
contract is obligated to fulfill the terms of the
contract.
Key notes:
● Futures are financial contracts obligating
the buyer to purchase an asset or the
seller to sell an asset and have a
predetermined future date and price.
● A futures contract allows an investor to
speculate on the direction of a security,
commodity, or a financial instrument.
● Futures are used to hedge the price movement
of the underlying asset to help prevent losses
from unfavorable price changes.
Futures
Market
 What is a Futures Market ?
A futures market is an auction market in which
participants buy and sell commodity and futures
contracts for delivery on a specified future date.
Futures are exchange-traded derivatives
contracts that lock in future delivery of a
commodity or security at a price set today.
 Examples of futures market
Examples of futures markets are the New York
Mercantile Exchange (NYMEX), the Kansas City
Board of Trade, the Chicago Mercantile Exchange
(CME), the Chicago Board of Trade (CBoT),
Chicago Board Options Exchange (CBOE) and the
Minneapolis Grain Exchange.
 Origins
Originally, such trading was carried on through
open outcry and the use of hand signs in trading
pits, located in financial hubs such as New York,
Chicago, and London. Throughout the 21st
century, like most other markets, futures
exchanges have become mostly electronic.
Key notes:
● A futures market is an exchange where futures
contracts are traded by participants who are
interested in buying or selling these derivatives.
● In the U.S. futures markets are largely regulated by
the commodities futures clearing commission
(CFTC), with futures contracts standardized by
exchanges.
● Today, the majority of trading of futures
markets occurs electronically, with examples
including the CME and ICE.
● Unlike most stock markets, futures markets
can trade 24 hours a day.
There are two types of participants in Futures
Market:
● They are the producers or consumers of
assets or commodities and, by participating in
the futures market, they want to ensure that
they get a specific price for their products or
that they have to pay a price for a commodity
in the future.
● The other division of the futures market is the
Speculators. They do not have an intrinsic
stake in the underlying commodity or asset
but seek to profit from the movement of the
economy.
Characteristics
of Futures
Market
 Characteristics of Futures Market
● Future contracts:
Future contracts are traded on an exchange
during the private trading of forwarding
contracts.
● Future Agreement:
Future agreements require a margin to be
released at contract initiation, steadily rising
with fluctuating futures prices. In a forward
contract, there is no such margin
requirement.
● Since they are traded on an exchange, there are
high standardization of futures contracts. On
the other side, forward contracts are
customized according to counterparty
requirements.
● While the forward market is not controlled, the
state controls the futures market.
 Advantages of the future market:
● Margin requirements are well established in the futures
market for most commodities and currencies. A trader thus
knows how much margin a contract should bring up with.
● Most futures markets offer increased liquidity, especially in
currencies, indexes, and commodities that are widely traded.
This allows traders when they want to join and exit the
market.
● The value of assets decreases over time in choices and
significantly decreases the trader’s profitability. This is called
time decline. A futures trader must not worry about declining
time.
● In industries with high price changes, forward contracts are
used as a hedging tool, farmers, for instance, use these
contracts to safeguard themselves from the danger of falling
crop prices.
● For better risk management, many people enter into
forwarding contracts. Companies regularly use these
contracts to limit the danger of foreign currency exchange.
 Disadvantages of Futures Market:
● Some brokers may insist that customers close their positions
before delivery.
● Not as flexible when it comes to accounting.
● Trade-in predetermined quantities that are inflexible for an
accurate accounting.
● Traded mainly on US exchange.
● To get the full advantages, you need to be a professional trader.