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Futures 

A futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity for a price agreed today with delivery occurring at a specified future date.

The parties to a futures contract are the seller and the buyer.

The buyer undertakes to buy the underlying asset at the agreed price upon the expiry of the contract.

The seller undertakes to sell the underlying asset at the agreed price upon the expiry of the contract.

The futures contracts state the underlying asset, the amount and units of underlying assets per contract, the expiration date and the pre-agreed price.

 

Types of Futures Contracts

In a futures contract with physical delivery the buyer undertakes to buy and the seller undertakes to sell the standardized quantity of the underlying asset during the contract term. The asset is delivered at closing price of the futures contract expiration date.
In a futures contract with cash settlement the buyer and the seller settle by cash payments only. 

 

ATTENTION: For futures contracts that are settled by actual physical delivery of the underlying commodity (physical delivery futures), customers may not make or receive delivery of the underlying commodity. To learn about the position liquidation rules click here.

 

Futures Contract Specifications 

Each futures contract has definitive specifications which are determined by the stock exchange. In particular, these are:

  • the underlying asset or instrument
  • ticker symbol
  • type of settlement (physical delivery vs. cash settlement)
  • contract size, i.e. amount and units of the underlying asset per contract
  • expiration date (last trading date)
  • delivery months
  • minimum fluctuation (tick)
  • point value

E.g.: the corn futures traded at the Chicago Mercantile Exchange give the buyer a right to buy 5,000 bushels of corn. The delivery months are March, May, July, September and December. There are no contracts specifying other delivery months or size. As a rule the futures contracts are standardized to ensure substitution between the contracts for similar commodities. The type of settlement, the contract size and the months are determined by the stock exchange.

An important feature of the futures contracts is their high liquidity enabling the traders to buy or sell them at any time. Thanks to the advanced technologies, the stock exchange quotes spread across the world in a split second and make the stock exchanges accessible for both professional players and the grassroots. This boosts market volumes with various groups of buyers or sellers always trading on the exchange. 

If compare futures contracts vs. forwards, forward contracts need counterparty’s prior consent for early settlement while futures enable the investors to sell at current market price or withhold until the day of expiration.

An important feature of the futures contracts is their high liquidity enabling the traders to buy or sell them at any time. Thanks to the advanced technologies, the stock exchange quotes spread across the world in a split second and make the stock exchanges accessible for both professional players and the grassroots. This boosts market volumes with various groups of buyers or sellers always trading on the exchange.

If compare futures contracts vs. forwards, forward contracts need counterparty’s prior consent for early settlement while futures enable the investors to sell at current market price or withhold until the day of expiration.

 

LONG & SHORT

Everyone has heard of the purchase of futures contracts, also known as ‘going long’. Few have ever heard of ‘short selling’. However, the rules regulating stock exchange activities enable the investors to sell futures contracts without having them on hand in which case the position is short. The short seller gains the right to deliver the assets on the expiration date at the price and under the terms specified in the contract. Many market players prefer short selling to speculate on the price fall when they may profit from buying pre-sold futures at a cheaper price, thus exiting the market. 

Some may find it hard to understand the essence of short selling because you sell something you don’t actually have. Why do you need selling short futures contracts? You’ll need it to determine the sale price, if you believe that the market is going down and you’ll gain from buying the futures contracts back at a cheaper price.

Whether trading is long or short, the profit or loss depends solely on the difference between buy and sale prices.

To get a better understanding of commodity futures contracts, they may be grouped as follows below: 

Grains include wheat, corn, oats, soy beans, soy oil, soy meal, etc.

Meats include livestock, cattle, hogs, etc.

Metals cover platinum, silver, iron, gold, etc.

Softs include coffee, cocoa, sugar, orange juice, cotton, etc. 

Fоreign currencies include Swiss Franc, British Pound, Japanese Yen, Canadian Dollar, Mexican Peso, Australian Dollar

Index futures cover S&P 500 stock index, Dow Jones stock index, Nikkei 225 stock index, NASDAQ 100 stock index, USD stock index, DAX 30 german stock index, CAC 40 french stock index

 

Energy futures cover crude oil, heating oil, gasoline, natural gas, etc.

 

Wood


Margin

The futures margin is a guarantee required of both the seller and the buyer to ensure fulfillment of contract obligations. As a rule, stock exchanges determine the margin caps for each futures contract, expressed in money. Initial margin is required to open a position under the futures contract whereas the maintenance margin is required to maintain it (keep open). Usually the maintenance margin makes about 75% of the initial margin. Depending on the market conditions, though, it may be changed by both the stock exchange and the broker. 


Use of Futures

Both commodity and financial futures contracts may be used to hedge against market risks or to speculate on prices. The main types of futures traders in the futures trading market are hedgers, speculators and spreaders.
The main purpose of the hedgers is to reduce the risk level.
Speculators wish to profit from sale and purchase.
The spreaders profit from the difference in the price of two futures contracts. 


Futures Stock Exchanges


Delivery Months


Code
Delivery month
Code
Delivery month
F
January
N
July
G
February
Q
August
H
March
U
September
J
April
V
October
K
May
X
November
M
June
Z
December




Updated 20.03.2012, 17:07

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