Russian traders are used 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 relevant trading strategies? What are futures and how do they help traders earn money?
What are futures
According to the generally accepted definition among traders, futures are financial instruments that allow for the execution of fixed-term contracts for the underlying asset, which involve the conclusion between the buyer and seller of an agreement on the price and timing of the transaction. In turn, other aspects of the asset, such as, for example, quantity, color, volume, etc., are specified in separate specifications of the agreement. Futures are a fairly universal financial instrument. They can be adapted to a variety of areas of trading.
Are futures derivatives?
Yes, this is their kind. The term "derivative" is understood by many traders as a synonym for the phrase "derivative financial instrument", that is, one that complements the classic transaction of sale. Derivatives and futures - this is a written agreement that defines the provisions of the contract for the seller and the buyer. The specificity of any derivative is that in essence it can itself be the subject of a contract of sale. That is, there may not be a real transfer of goods from the supplier to the buyer.
Futures history
In order to sufficiently study the essence of futures, it will be useful to find out how these financial instruments appeared, what are the main historical stages of their implementation in financial turnover. Some traders believe that the mechanism of relations 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 often happens in economics, a phenomenon first appeared, and then a term that characterizes it.
The market demanded innovation
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 completely among the key objects of world trade. Farmers who grew cereals sent them to customers by land or sea. In the autumn, there was often an overabundance of product supply on the grain market - farmers sought to sell their crops as soon as possible. In turn, in spring there could be a grain deficit, which simply did not have time to grow, while what was not sold, managed to deteriorate in the fall, since it often had nowhere to store. The market somehow needed to resolve this imbalance. Thus, urgent financial instruments appeared that allowed farmers growing grain, as well as suppliers of any other agricultural products, to conclude contracts with customers before the cereals had time to ripen or arrive at the point of sale.
Universal tool
Those agreements began to be called forward (from the English forward - "forward"). Futures - it can be said, adaptation of a forward contract to the peculiarities of trading on the exchange. Experts associate their appearance with established transaction standards in the business, so that appropriate agreements can be concluded regardless of the type of product being sold. As a result, futures trading spread to transactions in which not only grain and other agricultural products are sold and bought, but also raw materials, metals, some finished food products: sugar, coffee, etc. Relatively new, if we talk about the history of commodity relations, financial exchanges adapted to the instrument.
From raw materials to stock indices
There is evidence that the first trading of futures in trading was conducted on the Dow Jones exchange for transactions on the index of the same name. As a result, financiers got an excellent financial risk insurance tool - just like grain suppliers could do in the fall. Over time, futures for indices became so widespread that trading volumes on them sometimes began to exceed performance on classic deals.
Forex Futures
The new financial instrument began to penetrate also in the foreign exchange markets. One of the factors that interested traders 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 the new norms, quotations on the world currency market began to undergo strong fluctuations. Traders suggested that futures are the very tool that will help the market go through a phase of high volatility.
Appropriate trading mechanisms were introduced, and due to the rapid growth of their popularity, experts suggested that this was exactly what the market required. Futures on 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 20s to the 1991th, this trade institution in our country did not function. But after the transition of Russia to a free market, it became one of the key for the country's economy.
When did the first futures transactions begin in Russia? There is evidence that the first precedents for the use of this financial instrument were recorded in 1996 on the St. Petersburg Exchange. The first analytical articles began to appear, in which theses were put forward on the prospects of involving futures in Russian trading. In the 1990s, through this financial instrument, contracts for government and municipal bonds began to be executed.
Now on both major Russian exchanges we use futures (RTS and MICEX). On the first there is even a specialized segment for trading using this financial instrument - FORTS. Available on FORTS futures and options (another popular way to conclude 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 first must fulfill the conditions 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 stocks if they have fallen in price in comparison with the price at the time of their purchase.
Types of Futures. Staged
However, we continue to study futures. Modern traders classify them into two types. Firstly, there are so-called staged futures. They represent a contract, at the time of which the buyer agrees to purchase, and the seller - to cede the amount of some asset specified in the transaction specification. At the same time, the price of the futures will be the one that is fixed at the latest trading. If the contract expires and the seller does not cede the asset, penalties may await him.
Estimated
There are also settlement futures. Their peculiarity is that the seller and the buyer pay each other 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
One of the key elements of futures transactions is specification. It represents a source in which the basic conditions of the contract are fixed. The structure of the specifications of transactions of the type in question is usually as follows: the name of the agreement is indicated, its specific type is settlement or staged, the value of the underlying asset, the timing, as well as some speculative parameters. Among the key can be called a tick, or the minimum step of price changes.
Its values depend on the specific 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 over the entire amount of the asset. For example, if an agreement is reached on wheat for 200 tons, then it can be estimated that the minimum price adjustment will be $ 10.
Oil futures
How are, say, Brent and other oil futures traded? 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, since other grades of oil are evaluated on the basis of correlation with the value of traded. Contracts for black gold are carried out on two major exchanges - NYMEX in New York, and ICE in London. The American oil trade is Light Sweet, and the English is trading in two other varieties. Features of the black gold trade are that they are around the clock.
The generally accepted benchmark for traders on the planet is the Brent variety. This oil is a marker for a significant part of the world grades of black gold, including Russian oil Urals. However, as some analysts note, among traders there are activists who do not consider it appropriate to keep Brent as the standard. The main reason is that it is mainly mined in the North Sea, in the Norwegian fields. Their stocks are decreasing, as a result of which, according to some analysts, the liquidity of the goods is decreasing, and the price of oil may not reflect real market trends.
Brent futures can be easily identified 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 monthly. Accordingly, transactions can be made at an interval of a month. The maximum duration of the contract is 8 years. There are short-term oil futures, and there are long-term ones. The value of the relevant contract is 1 thousand barrels. The value of 1 tick is a cent, that is, the minimum change in the contract price is 10 dollars.
How to win at 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 conclude a contract to buy or sell oil at a set price, thus opening a long or short position, respectively. Suppose, at a cost of oil of $ 80 per barrel, a person assumes that in 3 months the raw materials will grow to $ 120. He concludes 1 minimum contract for the purchase of black gold at a price of $ 90 per barrel. Comes 3 months. Oil is expected to rise in price to $ 120 per barrel, and it is at the disposal of the trader at a price of 90. He, according to the terms of the exchange, is immediately credited with the required difference of $ 40.
Futures and Currency
Obviously, in order to trade using oil futures, a trader will need significant cash investments. The minimum size of the contract, as we have already noted, is 1 thousand barrels, that is, if we take current, not the highest prices for black gold, investments of about 50 thousand dollars will be required. However, the trader has the opportunity to earn money by concluding futures on the dollar, on the MICEX, for example. According to the conditions of the exchange, the minimum contract volume is 1 thousand dollars. Tick - 10 cents.
For example, a person assumes that the US dollar will decrease from the current 65 rubles to 40. He opens a long position for the sale of one contract at a price of, say, 50 dollars, the term is 1 month. A month later, the ruble really strengthens its position - up to 40 units per US dollar. A person has the right to sell the amount specified in the specification of the contract at a rate of 50 dollars and to earn 10 rubles from each unit of American currency from the exchange rate difference . But if he does not guess the course, he will have to fulfill obligations to the exchange in one way or another. Usually this happens due to placing a deposit of the required size on the trading platform’s account.
Similar earnings mechanisms are possible when trading stocks of enterprises. With a balanced, qualified analysis of the situation on 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 at his disposal convenient analytical tools, for example, a futures chart for a selected asset. The use of an appropriate financial mechanism among Russian financiers has gained fairly steady popularity.