Futures - what they are and what they are for. What is a futures contract in simple words What does futures mean
Futures is a derivative financial instrument, a contract to buy / sell an underlying asset on a specified date in the future, but at the current market price. Accordingly, the subject of such an agreement (underlying asset) may be stocks, bonds, goods, currency, interest rates, inflation rate, weather, etc.
A simple example. The farmer has planted wheat. The price for this product on the market today, conventionally, is 100 rubles per ton. At the same time, forecasts are coming from all sides that the summer will be good, and the harvest in the fall - excellent, which will invariably cause an increase in supply on the market and a fall in prices. The farmer does not want to sell grain in the fall at 50 rubles per ton, so he negotiates with a certain buyer that he will be guaranteed to supply him 100 tons of grain in 6 months, but at the current price of 100 rubles. That is, our farmer thus acts as a seller of a futures contract.
Fixing the price of a commodity that will be delivered after a certain period of time, at the time of the conclusion of the transaction - this is the meaning of a futures contract.
Derivative financial instruments appeared along with trading. But initially it was a kind of unorganized market based on oral agreements between, for example, merchants. The first contracts for the supply of goods at some point in the future appeared along with the letter. So, already on the cuneiform tablets of centuries BC, which were found during excavations of Mesopotamia, one can find a certain prototype of a futures. By the beginning of the 18th century, the main types of financial derivatives appeared in Europe, and capital markets acquired the features of modern ones.
In Russia today, you can trade futures on the derivatives market of the Moscow Exchange - FORTS, where one of the most popular instruments is the RTS index futures. The volume of the futures market around the world today significantly exceeds the volume of real trading in underlying assets.
BCS is the market leader in terms of turnover in the FORTS derivatives market. Earn with us!
Technical details
Each futures contract has specification- a document, fixed by the exchange itself, which contains all the basic conditions of this contract: - name; - ticker; - type of contract (settlement / delivery); - size (number of units of the underlying asset per one futures); - circulation period; - date of delivery; - minimum price change (step); - the cost of the minimum step.
Thus, the RTS index futures are currently traded under the ticker RIZ5: RI - the code of the underlying asset; Z - code of the month of execution (in this case, December); 5 - code of the year of contract execution (last digit).
Futures contracts are "settlement" and "delivery". A delivery contract implies the delivery of the underlying asset: if you agreed to buy gold at a certain price in 6 months, you will get it, everything is simple here. Calculated futures do not imply any delivery. Upon the expiration of the contract, the profit / loss is recalculated between the parties to the contract in the form of accrual and write-off Money.
Example: We bought 1 futures on the Russian RTS index, assuming that the Russian index will rise by the end of the contract period. The circulation period has ended, or, as is often said, the expiration date has come ( expiration date), the index has grown, profit has been accrued to us, no one has supplied anything to anyone.
The futures circulation period is the period during which we can resell or buy back this contract. When this period ends, all participants in transactions with the selected futures contract are obliged to fulfill their obligations.
The futures price is the current price of the contract. During the life of the contract, it changes, up to the expiration date. It is worth noting that the price of a futures contract differs from the price of the underlying asset, although it has a strong direct dependence on it. Depending on whether the futures are cheaper or more expensive than the price of the underlying asset, situations called "contango" and "backwardation" arise. That is, the current price includes some circumstances that may occur, or, in general, the mood of investors regarding the future of the underlying asset.
Benefits of trading futures
The trader gets access to a huge number of instruments traded on different exchanges around the world. This provides opportunities for broader portfolio diversification.
Futures have high liquidity, which makes it possible to apply various strategies.
Reduced commission compared to the stock market.
The main advantage of a futures contract is that you don't have to shell out as much money as you would have to buy (sell) the underlying asset directly. The fact is that when making a transaction, you use a guarantee collateral (GO). This is a refundable fee that the exchange charges when you open a futures contract, in other words, a certain deposit that you leave when making a transaction, the amount of which depends on a number of factors. It is easy to calculate that the leverage that is available in futures transactions allows you to increase your potential profit many times over, since the GI is most often noticeably lower than the value of the underlying asset. However, don't forget about the risks.
It is important to remember that GO is not a fixed amount and can change even after you have already bought a futures contract. Therefore, it is important to monitor the state of your position and the level of GO so that the broker does not close your position at the moment when the exchange slightly increased the GO, and there is no additional funds on the account at all. BCS company provides its clients with an opportunity to use the service. Access to trading on the derivatives market is provided on the QUIK or MetaTrader5 terminals.
Trading strategies
One of the main advantages of futures is the availability of various trading strategies. .
The first option is risk hedging. Historically, as we wrote above, it was this option that gave rise to this type of financial instrument. The first underlying asset was various products Agriculture... Not wanting to risk their income, the farmers sought to to conclude contracts for the supply of products in the future, but at the prices agreed upon now... Thus, futures contracts are used as a way to reduce risks by hedging both real activity (production) and investment transactions, which is facilitated by fixing the price already now for the asset we have chosen.
Example: we are now seeing significant fluctuations in foreign exchange market... How can you protect your assets during periods of such turbulence? For example, you know that in a month you will receive revenue in US dollars, and you do not want to take the risk of changes in the exchange rate during this time period. To solve this problem, you can use a futures contract for a dollar / ruble pair. Let's say you expect to receive $ 10K and the current exchange rate satisfies you. In order to hedge yourself against an unwanted rate change, you sell 10 contracts with a matching expiration date. Thus, the current market rate is fixed, and if it changes in the future, this will not be reflected in your account. The position is closed immediately after you receive real money.
Or another example: You have a portfolio of Russian blue chips... You plan to hold shares for a long enough time, more than three years, in order to be exempted from payment of personal income tax... But at the same time, the market has already grown quite high and you understand that a downward correction is about to happen. You can sell futures on your stocks or the entire MICEX index as a whole, thereby insuring against a fall in the market. If the market goes down, then you can close your short positions in futures, thereby leveling the current losses on the securities in the portfolio.
Speculative operations... The two main factors contributing to the growing popularity of futures among speculators are liquidity and a large "leverage".
As you know, the speculator's task is to profit from the difference between the purchase and sale prices. Moreover, the potential for profit is maximum here, and the terms of holding open positions are minimal. At the same time, in favor of the speculator there is also such a moment as a reduced commission in comparison with the stock market.
Arbitration operations are another option for using futures, the meaning of which is to make a profit from the "game" on calendar / inter-commodity / inter-market spreads. ...
To learn more about futures trading, you can read books such as Tod Lofton's Fundamentals of Futures Trading. It is also possible to visit various.
BCS Express
We recently looked at the topic. As you know, an option is a contract that gives its buyer the right to deal with an asset within a specified period of time. set price... The difference between futures contracts and options is that the execution of a transaction for the buyer of the futures is obligatory in the same way as for the seller. In this article, I will introduce the basic concepts of futures trading.
Basic concepts of futures contracts and examples
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A futures contract (or simply futures) is a contract under which the buyer agrees to buy and the seller agrees to sell a certain asset by a certain date at the price specified in the contract. These contracts are classified as exchange-traded instruments as they are traded exclusively on exchanges within the framework of standardized specifications and trading rules. Counterparties only negotiate the price and date of execution. All futures can be divided into 2 categories
- Delivery;
- Calculated.
Deliverable futures refer to the delivery of an asset on the date the contract expires. Such an asset can be a commodity (oil, grain) or financial instruments (currency, stocks). Settlement futures do not provide for the delivery of an asset and the parties only produce cash payments: the difference between the contract price and the actual price of the instrument at the date of execution. A more detailed classification of futures is based on the nature of the assets: commodities or financial instruments:
Initially, futures emerged as delivery commodity contracts, primarily for agricultural products: in this way, suppliers and buyers sought to protect themselves from the risks associated with a poor harvest or storage conditions. For example, the world's largest Chicago Mercantile Exchange (CME) was created in 1848 specifically to trade agricultural contracts. Financial futures appeared only in 1972. Even later (in 1981) the most popular to date futures on the S & P500 stock index appeared. According to statistics, only 2-5% of futures contracts end with the delivery of an asset. Such tasks as hedging deals and speculation come to the fore.
Each futures has a specification, which can include:
- name of the contract;
- type (settlement or delivery) of the contract;
- contract price;
- price step in points;
- period of circulation;
- the size of the contract;
- unit of trade;
- delivery month;
- date of delivery;
- trading hours;
- delivery method;
- restrictions (for example, on fluctuations in the currency of the contract).
During the time before the execution of the futures contract, the spot price of the asset can be either higher or lower than the contractual price, depending on this, the states of the futures are distinguished, called contango and backwardation.
- Contango- a situation in which an asset is traded at a lower price than the futures price, i.e. the participants in the transaction expect the asset price to rise.
- Backwardation- the asset is traded at a higher price than the futures price, i.e. the participants in the transaction expect the price to drop.
The difference between the futures price and the spot price of an asset is called basis futures contract. For example, in the case of contango, the basis is positive. On the day of delivery, the futures and spot prices converge to within the delivery value, this is called convergence. The reason for convergence is that the asset storage factor ceases to play a role.
In the event that there is a consistent decline in the basis of a futures contract, the dealer can play on it. For example, buying grain in November and simultaneously selling futures for delivery in March. When the delivery date comes, the dealer sells the grain at the current spot price and at the same time makes the so-called. an offset deal at the same price by buying out the futures. Thus, hedging the price risk by using futures allows to recoup the costs of storing the goods. Just like other exchange-traded instruments, futures allow traditional methods to be applied technical analysis... For them, the concepts of trend, support and resistance lines are valid.
Futures contract margin and financial result
When opening a deal with a futures contract, the account of each of its participants is blocked insurance coverage called the deposit margin. It usually ranges from 2 to 30% of the contract value. After the completion of the transaction, the deposit margin is returned to its participants. Sometimes there are situations in which the exchange may require additional margin. This situation is called.
This is usually associated with. If the participant of the transaction is unable to make additional margin, he is forced to close the position. In the event of a massive closing of positions, the asset price receives an additional impulse to change. For example, when long positions are closed massively, the price of an asset can fall sharply. In the FORTS market, the collateral for deliverable futures 5 days before the execution increases 1.5 times. If one of the parties refuses to fulfill the terms of the contract, the blocked amount of the guarantee security is withdrawn as a fine and transferred to the other party as compensation. Execution control financial commitments the participants in the transaction are carried out by the clearing house.
In addition, daily at close trading day a variation margin is charged on an open futures position. On the first day, it is equal to the difference between the price at which the contract was concluded and the closing price of the day (clearing) for this instrument. On the day of execution of the contract, the variation margin is equal to the difference between the current price and the price of the last clearing. Thus, the result of the transaction for a specific participant is equal to the sum accrual of variation margin for all days while the position under the contract is open.
The financial result of the transaction is BM1 + BM2 + BM3 = 600-400 + 200 = 400 rubles.
If a futures is a settlement and is purchased for speculative purposes, as well as in a number of other situations, it is preferable not to wait for the day of its execution. In this case, the opposite transaction is concluded, called offset. For example, if 10 futures contracts were purchased earlier, then exactly the same amount must be sold. After that, the obligations under the contract pass to its new buyer. On the New York Mercantile Exchange NYMEX (organizationally part of the CME), no more than 1% of open positions for the WTI mark reach the delivery. An important difference between a settlement futures and a deliverable one is that an open position of a settlement futures does not increase the margin on the eve of execution. The final price on the day of execution is based on the spot price. For example, in the case of gold futures, the London fixing on the COMEX (Commodity Exchange) is taken.
Futures and Contracts for Differences: Similarities and Differences
Profit arithmetic when trading settlement futures resembles a popular class of derivatives called CFDs (Contract for Difference). By trading CFDs, a trader makes money on the difference between the asset prices at close and open trading position... An asset can be stocks, stock indices, exchange commodities at spot prices, futures proper, etc. The main similarities and differences between futures and CFDs can be summarized in a table:
Tool | CFD | Futures |
Traded on the exchange | No | Yes |
Has a due date | — | Yes |
Traded in fractional lots | Yes | No |
Supply of an asset is possible | No | Yes |
Restrictions on short positions | No | Yes |
Unlike futures, CFDs are traded with forex brokers along with currency pairs, but not around the clock, but during trading hours on the respective exchanges, working with specific underlying assets. One of the most liquid futures contracts traded in Russian system FORTS, - futures on the RTS index. It is listed as a CFD on the streaming quote chart at investing.com/indices/rts-cash-settled-futures.
However, it is important not to confuse an exchange-traded instrument with an over-the-counter instrument. The fundamental difference between them is that the price of an exchange instrument is determined by the balance of supply and demand during trading, while dealing centers only allow betting on the rise or fall of the price, but not influence it. Among the most liquid futures contracts, it is necessary to name, first of all, futures on stock indices and on oil. On the American exchanges Dow Jones and S & P500 futures are traded on the Chicago Mercantile Exchange, while oil futures are traded on the NYMEX.
The most popular futures on the Moscow Exchange are for the RTS index (30% of the total turnover of futures trading) and for a couple of US dollars - the ruble (60% of the turnover). According to the specification, the price of a contract on the RTS index is equal to the value of the index multiplied by 100, and the value of the minimum price step (10 points) is equal to $ 0.2. Thus, today the contract is being traded above 100 thousand rubles. This is one of the reasons why non-professional traders choose more affordable CFDs.
For example, the minimum lot for CFD RUS50 (designation of the RTS index) is 0.01, and the price of 1 point is $ 10, therefore, with a maximum leverage of 1:25, a trader can trade the index with $ 500 on his account. In total, the company's clients have access to CFDs on 26 index and 11 commodity futures. For comparison, the largest in Russia offers CFD trading on only 10 index and 3 commodity futures.
There are commodities for which the concept of market price has no direct business case... First of all, it is oil. The first oil futures transactions took place in the early 1980s. But in 1986, Mexican oil company PEMEX pegged spot prices to futures for the first time, which quickly became the standard.
With global oil production of all grades of less than 100 million barrels per day, an average of about one million Brent oil futures contracts are concluded on the London ICE Futures Europe platform per day. According to the specification, the volume of one contract is 1,000 barrels. Thus, the total volume of oil futures traded on this one site is about 10 times higher than the global oil production. Small (about 1 million barrels. Or less) changes in WTI crude oil reserves in the United States are not able to affect the supply, but lead to futures trading. Since November 29, 2016, trading in Urals oil futures has been launched on the St. Petersburg International Commodity Exchange (SPIMEX).
Language exchange traders to an unprepared person it seems like a complete gibberish: forward, futures, hedging, option. Although, under these words are quite understandable actions. This is not an attempt to close ourselves off from the uninitiated, it’s just more convenient.
What is a futures contract
The meaning of the term "futures" can be understood based on the translation from of English language words future - future.
Futures (futures contract): a deal, the price and quantity of goods for which are fixed at the time of signing the contract, and obligations (the need to pay for the transaction) will arise through futures fixed time.
The “specific time” must be at least more than two business days. Otherwise, this transaction is called differently.
Simply put, futures are risk trading. At the same time, a counterparty who does not want to risk offers his future product at a bargain price. For this he receives a secured sale. The buyer, at his own risk, can receive the goods at a lower price in the future.
The difference between a futures contract and a forward contract is that forward Is a one-time, non-standardized, over-the-counter transaction. Futures are traded on the exchange, and all the time.
Often after the expiration date, real deal does not happen, is done payment of the difference between the contract price and the real market price on the day specified in the contract.
Suppose a farmer puts on the exchange futures for the sale of wheat at $ 100 per barrel in the spring. In the fall, the price of wheat at the time of repurchase is $ 110 per barrel. Here's 10% of the bottom line. And perhaps in a month it will be $ 130 per barrel.
In this case, the farmer is a hedger (), and his buyer is a speculator. This word still has a negative connotation in our country, although a stock speculator is a player who makes money on risky operations. The price could fall to $ 90, then the speculator would be in the red.
Read more about the difference between futures and options. While these concepts are very similar, there are differences.
Index Futures
Often in the economic news section one can hear the words: Dow-Jones, Nasdaq, RTS (Russian stock index). The value of these indices is calculated from the set of indicators of the economy to which the index belongs.
The first of these are American. The Dow Jones is an industrial index that characterizes the market position of the 30 largest US companies. Nasdak operates in high-tech corporations.
Futures contracts can be concluded not only for the supply of goods, but also for changes in indices. These futures are called index futures. Here, profit (or loss) is the change in the value of the index at which the deal was concluded. The contract specifies the price of one point, and after the end of the futures, calculations are made.
The purpose of entering into a contract may be speculation on changes in the index or hedging securities included in the calculation of this indicator.
On Russian exchanges, the most popular remains futures on the RTS index, which is characterized by:
- high liquidity;
- minimal costs;
- maximum leverage.
When entering into an index futures contract, all buyer-seller relationships occur through the exchange, without the need for direct contact. Both accrual of profit and write-off of losses.
After the expiration of the contract, each participant in the transaction, based on the results of trading, will be charged (or written off) the amount of the difference between the futures and the real, the exchange receives its interest for intermediation.
Gold futures
Just like regular futures, a gold trade has the same principles, only the underlying asset is gold. Futures can be (similar to other types of contracts):
The benefit of gold futures is that the exchange provides a leverage of 1:20. That is, to carry out transactions, a collateral amounting to 5% of the transaction amount is sufficient. But the risk increases proportionally.
Actions that make it possible to make a profit or reduce risks:
- buying in anticipation of an increase in the price of metal;
- buying in anticipation of a decrease in the price of metal;
- trading using the exchange "leverage";
- hedging losses from an increase in the value of gold;
- hedging losses from a decline in the value of gold.
Oil futures
Oil futures are traded by exchanges:
Now only 2% of futures transactions are made by real oil suppliers and consumers who hedge their risks. The remaining 98% of transactions are made by speculators.
Trading on exchanges is electronic, there is no physical delivery of oil... At the end of trading, settlements are made between the parties to the futures.
The benefit of working in this market is the provision of a leverage (1: 6), the minimum lot is 10 barrels. Therefore, you can start earning by investing a symbolic amount - a little more than 7,000 rubles.
Just as in the case of gold, having leverage represents both large gains and losses, in the same proportion.
Experts believe futures transactions are the most risky... The probability of success here is equal to the probability of losses - 50/50. Therefore, it is not recommended to invest more than 20% of the capital in this sector.
And the current reality of trading these instruments.
What is futures in simple words
Is a contract for the purchase or sale of the underlying asset in advance deadlines and at the agreed price, which is fixed in the contract. Futures are approved on the basis of standard conditions, which are formed by the exchange itself, where they are traded.
For each underlying asset, all conditions (delivery time, place, method, etc.) are set separately, which helps to quickly sell assets at a price close to the market price.
Thus, there is no problem for secondary market participants in finding a buyer or seller.
In order to avoid the buyer's or seller's refusal to fulfill the obligations under the contract, a condition is made for the provision of a pledge by both parties.
Not now economic situation dictates the price of futures contracts, and they, forming the upcoming supply and demand prices, set the pace for the economy.
What is Futures or Futures Contract
(from the English word future - future), this is a contract between a seller and a buyer, providing for the delivery of a specific product, stock or service in the future at a price fixed at the time of the conclusion of the futures. The main purpose of such instruments is to reduce risks, consolidate profits and guarantee delivery “here and now”.
Today almost all futures contracts are settlement, i.e. without obligation to supply real goods. More on this below.
First appeared on commodity market... Their essence lies in the fact that the parties agree on a deferred payment for the goods. At the same time, when concluding such an agreement, the price is negotiated in advance. This type of contract is very convenient for both parties, as it avoids situations where sharp fluctuations quotes in the future will provoke additional problems in setting prices.
- as financial instruments, they are popular not only among those who trade in various assets, but also among speculators. The thing is that one of the varieties of this contract does not imply real delivery. That is, a contract is concluded for a product, but at the time of its execution, this product is not delivered to the buyer. In this, futures are similar to other instruments. financial markets that can be used for speculative purposes.
What is a futures and for what purposes is it used? We will now cover this aspect in more detail.
"And for example, I want futures on some stocks that are not listed by the broker" is the classic understanding from the forex market.
Everything is a little different. It is not the broker who decides which futures to trade and which not. This is decided by the trading platform on which the trade is conducted. That is, the exchange. SberBank shares are traded on the MB - a very liquid chip, this is the exchange that provides an opportunity to buy and sell Sberbank futures. Again, let's start with the fact that all futures are actually are divided into two types:
- Estimated.
- Delivery.
A settlement futures is a futures that has no delivery. For example Si(futures on dollar-ruble) and RTS(futures on the index of our market) are settlement futures, there is no delivery for them, only settlement in monetary terms. Wherein SBRF(futures on Sberbank shares) - deliverable futures. It will be used for delivery of shares. The Chicago Exchange (CME), for example, has deliverable futures on grain, oil and rice.
That is, having bought oil futures there, you can actually bring barrels of oil.
It's just that we don't have such needs in Russia. To be honest, we have a whole sea of "dead" futures, for which there is no turnover at all.
As soon as the demand for deliverable oil futures appears on the MB - and people are ready to take out the barrels with Kamaz trucks - they will appear.
Their fundamental difference lies in the fact that when the expiration date comes (the last day of the futures circulation), there is no delivery under the settlement contracts, and the holder of the futures simply remains “in the money”. In the second case, the underlying instrument is actually delivered. There are only a few delivery contracts in the FORTS market, and all of them provide delivery of shares. As a rule, these are the most liquid shares domestic stock market, such as:, and others. Their number does not exceed 10 items. Deliveries for oil, gold and other commodity contracts do not occur, that is, they are calculated.
There are minor exceptions
but they relate to purely professional instruments such as options and low-liquid currency pairs ( banknotes CIS countries, except for hryvnia and tenge). As mentioned above, the availability of deliverable futures depends on the demand for their delivery. Sberbank shares are traded on the Moscow Exchange, and this is a liquid chip, so the exchange provides the opportunity to buy and sell futures on this share with delivery. It's just that we, in Russia, have no requirements for such a prompt supply of gold, oil and other raw materials. Moreover, our exchange has a huge number of “dead” futures, for which there is no turnover at all (copper, grain and energy futures). This is due to the banal demand. Traders do not see interest in trading such instruments and, in turn, choose the assets they know better (dollar, and stocks).
Who issues futures
The next question that a trader may have is: who is the issuer, that is, who issues futures into circulation.
With shares, everything is extremely simple, because they are issued by the very enterprise to which they originally belonged. At the initial placement, investors buy them out, and then they start trading on the secondary market we are familiar with, that is, on the stock exchange.
It's still easier in the derivatives market, but it's not entirely obvious.
Futures is, in fact, a contract that is entered into by two parties to the transaction: buyer and seller... After a certain period of time, the first undertakes to buy from the second a certain amount of the base product, be it stocks or raw materials.
Thus, traders themselves are the issuers of futures, the exchange simply standardizes the contract they conclude and strictly monitors the fulfillment of obligations - this is called.
- This begs the following question.
If everything is clear with stocks: one supplies stocks and the other buys them, then, in theory, what should be the case with indices? After all, a trader cannot transfer the index to another trader, since it is not material.
This reveals another subtlety of the futures. At the moment, for all futures, it is calculated, which represents the trader's income or loss, relative to the price at which the deal was concluded. That is, if after the sell transaction the price began to rise, then the trader who opened this short position will begin to suffer losses, and his counterparty who bought this futures from him, on the contrary, will receive a profitable difference.
A fixed-term contract is actually a dispute, the subject of which can be anything. For indices, hypothetically, the seller should provide just an index quote. Thus, you can create futures for any amount you want.
In the US, for example, weather futures are traded.
The subject of the dispute is limited only common sense organizers of the exchange.
Do such contracts make any financial sense?
Of course they do. The same American weather futures depends on the number of days in the heating season, which directly affects other sectors of the economy. One way or another, the market continues to perform one of its main tasks: the accumulation and redistribution of funds. This factor plays a huge role in the fight against inflation.
The history of the emergence of futures
The futures market has two legends or two sources.
- Some believe that futures originated in the former capital Of Japan the city Osaka... Then the main traded "instrument" was rice... Naturally, buyers and sellers wanted to insure themselves against price fluctuations and this was the reason for the emergence of such contracts.
- The second story says, like most others financial instruments, the history of futures began in the 17th century in Holland when Europe was overwhelmed " tulip mania". The onion cost so much money that the buyer simply could not buy it, although some of the savings were present. The seller could wait for the harvest, but no one knew what it would be, how much they would have to sell, and what to do in case of a crop failure? This is how the deferred contracts arose.
Let's give a simple example ... Suppose the owner of a farm is growing wheat... In the process of work, he invests money in the purchase of fertilizers, seeds, and also pays for the work of hired workers. Naturally, in order to continue, the farmer must be sure that all his expenses will pay off. But how can you get such confidence if you cannot know in advance what the prices for the harvest will be? After all, the year can be fruitful and the supply of wheat on the market will exceed demand.
You can insure your risks using futures. The owner of the farm can conclude in 6 or 9 months at a certain price. Thus, he will know now how much his investment will pay off.
This is the best way to insure price risks. Of course, this does not mean that the farmer benefits unconditionally from such contracts. After all, situations are possible when, due to a severe drought, the year will be poor and the price of wheat will rise significantly higher than the price at which the contract was signed. In this case, the farmer will not be able to raise the cost, since it has already been fixed under the contract. But all the same, it is profitable, since the farmer has already included his expenses and a certain profit.
This is also beneficial for the buying side. After all, if the year is bad, the buyer of the futures will save a lot in this case, since the spot price for raw materials (in this case, wheat) can be significantly higher than the price under the futures contract.
A futures contract is an extremely important financial instrument used by most of the world's traders.
Translating the situation onto today's rails and taking as an example Urals or Brent , a potential buyer asks the seller to sell him a barrel for delivery in a month. He agrees, but, not knowing how much he will be able to help out in the future (quotes may fall, as in 2015-2016), he proposes to pay now.
The modern history of futures dates back to 19th century Chicago. The first commodity for which such a contract was concluded was grain. Initially, farm owners brought grain or livestock to Chicago and sold to dealers. At the same time, the price was determined by the latter and was not always profitable for the seller. As for the buyers, they faced the problem of delivering the goods. As a result, the buyer and seller began to dispense with dealers and conclude contracts with each other.
What is the scheme of work in this case? It could be as follows - the owner of the farm was selling grain to a merchant. The latter had to ensure its storage until it becomes possible to transport it.
The merchant who bought grain wanted to insure himself against price changes (after all, storage could be quite long up to six months or even more). Accordingly, the buyer went to Chicago and there entered into contracts with the grain processor. Thus, the merchant not only found a buyer in advance, but also ensured an acceptable price for grain.
Gradually, such contracts gained acceptance and popularity. After all, they offered undeniable benefits to all parties to the transaction.
For example, a buyer of grain (a merchant) could refuse to buy and resell his right to another.
As for the owner of the farm, if he was not satisfied with the terms of the transaction, he could always sell his obligations for delivery to another farmer.
Attention to the futures market was also shown by speculators who saw their benefits in such trading. Naturally, they were not interested in any raw materials. Their main goal is to buy at a lower price in order to sell at a higher price.
Originally, futures contracts appeared only on cereals... However, already in the second half of the 20th century, they began to be concluded on live cattle... In the 80s, such contracts began to be concluded for precious metals and then on stock indices.
In the course of the development of futures contracts, several problems arose that needed to be solved.
- First, we are talking about certain guarantees that the contracts will be fulfilled. The task of guaranteeing is undertaken by the exchange on which the futures are traded. Moreover, here the development went in two directions. On the exchanges, special stocks of goods and funds were created to fulfill obligations.
- On the other hand, the resale of contracts became possible. Such a need arises if one of the parties to a futures contract does not want to fulfill its obligations. Instead of giving up, it resolds its rights under a contract to a third party.
Why is futures trading so widespread? The fact is that goods have certain limitations for the development of exchange trading. Accordingly, to remove them, contracts are needed that will allow you to work not with the product itself, but only with the right to it. Under the influence of market conditions, the owners of the rights to the goods can sell or buy them.
Today, transactions in the futures market are concluded not only for commodities, but also for currencies, stocks, indices. In addition, there are a huge number of speculators here.
The futures market is very liquid.
How futures works
Futures, like any other exchange-traded asset, has its own price, volatility, and the essence of traders' earnings is to buy cheaper and sell more expensive.
When a futures contract expires, there may be several options. The parties remain with their money or one of the parties makes a profit. If by the time of execution the price of the goods rises, the buyer gets the profit, since he purchased the contract at a lower price.
Accordingly, if at the time of execution the value of the goods decreases, the seller gets the profit, since he sold the contract at a higher price, and the owner gets some loss, since the exchange pays him an amount less for which he bought the futures contract.
Futures are very similar to options. However, it is worth remembering that they provide not the right, but the obligation of the seller to sell, but the buyer to buy a certain amount of goods at a certain price in the future. The exchange acts as the guarantor of the transaction.
Technical highlights
Each individual contract has its own specification, the main terms of the contract. Such a document is confirmed by the exchange. It reflects the name, ticker, type of contract, volume of the underlying asset, circulation time, delivery time, minimum price change, as well as the cost of the minimum price change.
Concerning settlement futures, they are purely speculative in nature. After the expiration of the contract, no delivery of the goods is expected.
It is settlement futures that are available to everyone individuals on exchanges.
Futures cost Is the price of the contract at a given point in time. This price can change until the moment of contract execution. It should be noted that the futures price is not the same as the underlying asset price. Although it is formed based on the price of the underlying asset. The difference between the price of a futures and an underlying asset is described in terms such as contango and backwardation.
The price of the futures and the underlying asset may differ(despite the fact that by the time of expiration this difference will not exist).
- Contango- the cost of the futures contract before expiration ( futures expiration) will be higher than the asset value.
- Backwardation- a futures contract is worth less than the underlying asset
- Basis Is the difference between the value of an asset and a futures.
The basis varies depending on how far the expiration date of the contract is. As we approach the moment of execution, the basis tends to zero.
Futures trading
Futures are traded on exchanges such as FORTS in Russia or CBOE in Chicago, USA.
Futures trading enables traders to take advantage of numerous benefits. These include, in particular:
- access to a large number of trading instruments, which allows you to significantly diversify your portfolio of assets;
- the futures market is very popular - it is liquid, and this is another significant plus;
- when trading futures, a trader does not buy the underlying asset itself, but only a contract for it at a price that is significantly lower than the cost of the underlying asset. It is about warranty coverage. This is a kind of collateral that is charged by the exchange. Its size varies from two to ten percent of the value of the underlying asset.
However, it is worth remembering that the warranty is not a fixed amount. Their size may vary even when the contract has already been purchased. It is very important to monitor this indicator, because if there is not enough capital to cover them, the broker can close positions if there are not enough funds on the trader's account.
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