A large number of various financial instruments participate in trading on the exchange. One of them, and, moreover, very popular, is a futures contract. What is it and what are its features - this will be discussed in our article.
Essence and concept
"Future" - translated from English means "future" or "future".
A futures contract (sometimes simply called a futures contract) is an agreement to sell or purchase the goods specified in this contract on a specific day and at a pre-agreed price. The role of such a product may be stocks, currency, or just some product. A futures contract as a kind appeared because both producers and buyers wanted to make sure that they did not benefit from rising or falling prices in the metals, energy or grain business sectors. Later, as it developed, this type of transaction began to extend to other types of trading instruments. In particular, they began to enclose it on stock indices, interest rates, currencies, etc. Currently, the world's largest futures exchanges operate, where the lion's share of trading in this instrument is taking place. The most famous of these sites are the Chicago Board of Trade, NYMEX (New York), LIFFE (London), FORTS (RTS section).
How is a futures contract different from a forward
You can buy goods in the future at an earlier agreed price using another tool. This is a forward contract. It is also quite popular, and it is often used to hedge risks. Often, novice investors confuse forward and futures contracts, and therefore we indicate their main differences:
- Futures traded only on an organized exchange.
- Forwards are binding and are usually made for the purpose of real delivery of goods.
- Futures have great liquidity and can be liquidated by concluding a reverse (opposite) transaction.
Longs and Shorts
When it comes to buying a contract, it means concluding a long deal or long. In this case, the buyer undertakes to accept a certain primary asset from the exchange and, upon the expiration of the contract, pay the exchange the amount indicated in it. Short is the reverse operation. When the futures contract is “for sale”, the supplier is obliged to sell (deliver) to the exchange a certain asset when the contract is due for which the exchange will transfer the corresponding amount of money to it according to the price indicated in this contract. And in either case, one should not worry about the fulfillment of obligations - the Clearing and Clearing Chamber monitors this. Thus, it is not necessary for the investor to check the financial position of the counterparty.
Basic conditions
In order to conclude a futures contract, it is necessary to make a certain deposit on the brokerage account of the company. This amount is called the initial margin, and the account to which it is deposited is known as the margin account. Its minimum size is established by the clearing house, guided by the accumulated statistics and taking into account the maximum daily deviations of the asset value. A brokerage company may also require a larger amount of margin from the investor. In addition, the client must have a futures account on which must be at least 65% of the initial collateral. If this condition is not met, the broker will notify the investor of the need to make additional funds to achieve the initial (variation) margin level . Also, if this requirement is missed, the broker has the right to liquidate such a futures contract using the opposite operation at the expense of the client. Every day, at the end of the trading session, the clearing house recalculates all open positions: the winning amount is credited to the account of successful investors from the account of those who lost. Also, the positions of the parties are adjusted or their total number is limited.