Assignment of Financial Derivatives

TO P I C : F U T U RE C O N T R A C T

S U BMI T T E D TO
D R . D I V YA N I G A M

S U B MI T T E D B Y
S H R A D D H A T I WA R I
MBA ( F M) 4 T H S E M
226315
What is Future Market?
A futures market is a financial marketplace where participants trade futures contracts for
commodities, stock indices, currency pairs, and interest rates at a pre-determined rate and
agreed-upon future date. It, thus, protects investors and traders from losing money on a
transaction even if the price of the commodity or financial instrument rises or falls later.

Futures markets are typically highly regulated and operate through centralized exchanges, such
as the Chicago Mercantile Exchange (CME Group) in the United States or the Intercontinental
Exchange (ICE).
What is Future Contract?
A futures contract is a standardized financial agreement between two parties, typically traded
on a regulated exchange, obligating the buyer to purchase and the seller to sell a specified
quantity of an underlying asset at a predetermined price (the futures price) on a specified future
date (the expiration date).
These contracts are legally binding and are used primarily for hedging against price fluctuations
or for speculative purposes.
Common types of futures contracts include those for agricultural products (such as wheat, corn,
and soybeans), energy commodities (such as crude oil and natural gas), metals (such as gold and
silver), financial instruments (such as stock indices, interest rates, and currencies), and more
recently, cryptocurrencies.
Characteristics Of Forward Market
1. Standardized Contract: Futures contracts are standardized agreements traded on regulated
exchanges. They specify the quantity, quality, expiration date, and delivery terms of the
underlying asset.
2. Underlying Asset: Each futures contract is based on a specific underlying asset, which could
be a commodity (like oil or wheat), a financial instrument (like a stock index or bond), or
even a cryptocurrency (like Bitcoin).
3. Expiration Date: Futures contracts have a predetermined expiration date, also known as the
maturity date or delivery date, upon which the contract must be settled. After this date, the
contract ceases to exist.
4. Futures Price: The price at which the underlying asset will be bought or sold on the
expiration date is known as the futures price. It is agreed upon when the contract is initiated.
5. Leverage: Futures contracts typically require only a fraction of the contract value to be
deposited upfront as margin. This allows traders to control a larger position with a smaller
amount of capital, amplifying potential gains but also magnifying losses.
6. Margin Requirements: Futures contracts require traders to maintain a margin account,
which serves as collateral against potential losses. Margin requirements are set by the
exchange and vary based on factors such as the volatility of the underlying asset.
7. High Liquidity: Futures markets are highly liquid, with a large number of buyers and sellers
actively trading contracts throughout the trading day. This liquidity ensures that traders can
enter and exit positions quickly and at fair prices.
8. Regulated Exchanges: Futures contracts are traded on regulated exchanges, such as the
Chicago Mercantile Exchange (CME Group) or the Intercontinental Exchange (ICE), which
provide a transparent and orderly trading environment with rules and oversight to ensure
fair and efficient trading.
9. Margin Requirements: Futures contracts require traders to maintain a margin account,
which serves as collateral against potential losses. Margin requirements are set by the
exchange and vary based on factors such as the volatility of the underlying asset.
 Risk Associated With Future Contract:

Counterparty Risk: One of the primary risks associated with forward contracts is counterparty risk.
Since forward contracts are privately negotiated agreements between two parties, there is a risk that one
party may default on its obligations. If the counterparty fails to fulfill its obligations, the other party may
incur financial losses or face difficulties in executing the contract.
1.Price Risk: Forward contracts expose participants to price risk, which is the risk of adverse movements
in the market price of the underlying asset. If the market price of the asset moves unfavorably relative to
the forward price specified in the contract, one party may incur losses upon settlement or delivery of the
asset.
2.Liquidity Risk: Forward contracts are typically traded over-the-counter (OTC) rather than on
centralized exchanges. As a result, participants may face liquidity risk, which refers to the risk of being
unable to find a counterparty to enter into or exit a forward contract. This can lead to challenges in
executing transactions at desired prices or in desired quantities.
4. Interest Rate Risk: For forward contracts involving interest-bearing assets, such as bonds or interest
rate derivatives, participants are exposed to interest rate risk. Changes in interest rates between the
initiation and maturity of the contract can affect the value of the underlying asset and, consequently, the
profitability of the contract.
5. Delivery Risk: In forward contracts that involve physical delivery of the underlying asset, there is a
risk of delivery failure or logistical issues. Factors such as transportation constraints, storage costs, and
quality discrepancies may impact the ability to deliver or receive the asset as agreed upon in the contract.
6. Regulatory Risk: Regulatory changes or interventions can affect the terms and conditions of forward
contracts and the parties' ability to fulfill their obligations. Changes in tax laws, exchange controls, or
derivatives regulations may impact the legality, enforceability, or economic viability of existing forward
contracts.
7. Market Risk: Forward contracts are subject to general market risk, including systemic risks, economic
downturns, geopolitical events, and other factors that can influence market prices and volatility. These
external factors can impact the performance and value of forward contracts regardless of the underlying
asset.
8. Operational Risk: Operational risks, such as errors in trade execution, settlement failures, or
technological disruptions, can impact the smooth functioning and execution of forward contracts.
Participants should have robust operational processes and controls in place to mitigate such risks.
THANK YOU!!!