What are futures? You can see the definition of this term on any website of financial markets, including Forex. Futures is a liability that implies the acquisition in any financial market of any assets at a fixed price. As with any purchase and sale transaction, an appropriate contract is concluded between the buyer and seller. At the same time, the first undertakes to acquire the asset within the agreed time period, and the second undertakes to sell the same asset at the price fixed at the time of the transaction. The contract must necessarily stipulate the types of assets, their sizes, the term of the transaction and the set price. The list of futures products is quite large, the main ones are futures for grain, metals, wood, steel, cotton, oil and currency.
Objectively enough characterizes the concept of what futures are, its translation from English - “future” - the future. And in fact, with futures, the conclusion of a contract for the supply of a certain product is carried out in a timely manner. At the conclusion of the contract , a specific delivery date must be agreed upon, after which both the buyer and seller have the right to sell or buy this futures.
Often, participants in the financial market who conduct intraday trading use futures for speculation and expect to profit from the estimated price, but most often this obligation can be used to insure trade risks.
What is futures, you can clearly show on the example of the interaction of farmers and bakery plants. Before this kind of trade occurred, these market participants had to put up with the losses that plagued them from price fluctuations. However, now the situation has changed for the better. So, the plant, having assumptions about rising grain prices, can conclude a futures contract in advance and after some time (for example, six months) pay for this very grain at the old, favorable price for it. In turn, the farmer, providing a significant reduction in grain prices, can protect themselves from the occurrence of such risks using futures.
One type of such contract is currency futures, which provides for the exchange of one currency for another at a previously agreed rate and on time. Traders who earn on futures contracts use a direct quote of currencies.
Currency futures help earn only those who can accurately predict the movement of the base currency. During the futures period, participants in the financial market must constantly monitor changes in the base price. Thanks to such monitoring, the trader will be able to protect himself from losses on time and get rid of the contract. Upon reaching profit by futures positions or reducing losses with their use, a decision is made to close such contracts.
In order to understand as precisely as possible what futures are, you must also deal with such a concept as an option. So, it is a contract according to which the buyer has the right to make a purchase at a previously set price.
What is an option? This clearly shows exchange trading, from the point of view of which exchange options with different prices or exercise dates can be considered different contracts. There are two types of them: exchange and over-the-counter. The first are standard exchange contracts, their circulation is identical to futures and the specification of the contract is determined using the exchange. At the time of conclusion of the transaction, participants in trading operations specify only the value of the premium on the option, and other standards and parameters are set by the exchange.
OTC options are not standardized, their main difference is that contracts are concluded on arbitrary terms agreed upon by participants when entering into transactions. The conclusion procedure is absolutely identical to forward contracts. The main consumers of the OTC market are fairly large financial institutions, and the main sellers are investment companies.