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All You Need to Know About Futures Contract

All You Need to Know About Futures Contract

As an agreement to buy or sell futures is in itself a contract, the terms “futures” and “futures contract” may be used interchangeably. From the definition of “futures,” we understand that futures contracts are contingent on the establishment of a value for an underlying asset and the assent on the part of the contract buyer-holder to buy or sell that asset at a certain point.
However, there is more to a futures contract than just the identity of the asset named and its face worth, also known as the strike price. In line with their reputations as low-risk enterprises, futures contracts contain other provisions that are meant to ensure the delivery of the commodities within a certain timeframe, or at least the delivery on the promise of purchase or sale that binds the holder.
As is to be expected, a futures contract cannot run on an interminable length, for there must be something to compel the holder to fulfill his or her part of the bargain in the event the underlying asset loses value. This is where what is known as the delivery month comes into play. In the very formation of futures contracts, a date by which the exchange is to be conducted is set, along with the price as mediated by the futures market.
In terms of how much time that usually affords the buyer, this can vary based on the commodity or other asset that receives the ascribed value. In any event, this termination month of the futures contract will be indicated by the coding system invented for classifying such an accord, with a different letter standing for each of the twelve months.
As for preemptive safeguards for the parties who enter into these accords, futures contracts contain a very important provision known as a margin. A margin is essentially a premium placed on a number of financial instruments for sellers that serves to limit the amount of risk to the buyer for being offered a faulty deal, and one that is not only determined by risk but by the rate of exchange.
Futures contracts are in many ways like straight forward contracts, as there is a contract at work in both and the same basic tenet of establishing a price and date for an eventual transaction involving a particular possession. However, a forward contract will not be held to the same conditions of standardization as a futures contract will, especially those that would be set as part of an exchange rate. This is because it is not exchanged, but traded over-the-counter.

Read This Before Any Futures Exchanges

Read This Before Any Futures Exchanges

It may be understood that, in futures
trading, a buyer and seller of the agreement are necessary for this financial
instrument to go into effect. Just the same, it may not be apparent as to the
avenue through which a transaction like this occurs.

 

As the term “futures trading”
implies, there is a market for these commodities-based contracts, or rather,
several markets. Such an entity that provides for commerce in futures is known
simply as a futures exchange and behaves much like other financial
exchanges in the United States and abroad, although with its own peculiarities.
Some notes about what to look for in a futures exchange and where the
most prominent ones may be found:



Futures trading is based on speculation
about the future value of certain classes of goods and other securities. By
proxy, it is a futures exchange which sets the values of futures
. 

 

It should be noted that futures
trading is very risky
. This owes to the nature of leverage. In the futures
exchange game, an initial deposit made to secure the rights to futures is
only a fraction of the total worth of the underlying

asset
. In the event the commodity grows in value,
the holder may well reap the rewards. That said, if that same commodity plummets
in value or even the rate of the contract itself worsens according to a futures
index, this could mean significant losses for the holder. Futures trading, in
short, is a gamble.

         

For those individuals who are serious about
trying their luck at a futures exchange, there are some prominent names of
which to be aware. One of the biggest exchanges in the United States is a
conglomerate of previously separated markets now known as the CME Group, based
in Chicago (and named after its chief component, the Chicago Mercantile
Exchange). Other notable futures exchanges in America are more specialized in
their application, such as the Minneapolis Grain Exchange and the Chicago
Climate Exchange.

 

In addition, foreign nations are also highly
invested in futures trading. Some major players on this front are the
International Securities Exchange and, by sheer volume of trade, the National Stock
Exchange
 of India.

What are the Available Futures Options

What are the Available Futures Options

As with options as a whole, futures
options also can be classified in terms of call and put options
. In either case, the market value of the underlying
commodity and the collection of the premium are the driving forces in futures
options. Essentially, in the “equation” to assess the worth of a
given futures option, the independent variable that will affect the
outcome is the underlying
asset, which is the futures contract itself.

 

The more valuable a commodity, the pricier
the future is, and thus all the more valuable to the call option holder.
Meanwhile, the less valuable the good, the cheaper the future and more valuable
to put holders as they will be able to sell the option itself for more than they
paid
for it, especially for those who are eager to
“buy low.”

 

Noting this confluence of futures and
options, it may be unclear as to how, or rather, where a futures option
might be traded. Owing to their relevance
to the subject of futures, though, futures options are bought
and sold on major futures exchanges
just as are straight futures contracts. Frequently, this
will be a specific exchange predicated on the type of commodity involved, be it
cotton, grain or sugar.










Read This to Understand Futures

Read This to Understand Futures

Background
As a division of derivatives, futures have much in common with others in this category, otably options.
Futures may play a valuable function for both producers and consumers alike. For consumers, establishing a price on a commodity through a futures contract guarantees that the listed price on the contract will hold up at a later date even if the market value of that good declines. In other words, a futures contract may serve as insurance for those people.
On the other hand, some consumer investors may be looking to take more of a gamble on the welfare of a chosen underlying asset and will look to trade futures as part of an exchange. In this scenario, investors will first buy a futures agreement at the strike price, and hope that the asset will rise in worth, yielding a net gain upon its sale. Just as easily, however, it could fall in value, resulting in an opposite, negative effect.

Futures Contract Specifics
There is more to futures contracts than simply listing an underlying asset and its price. Indeed, futures can be rather complicated when push comes to shove. In terms of specific details, there must be a time frame by which holders must make a transaction regarding the underlying asset, known as the delivery month. Otherwise, they could theoretically sit on their investment ad infinitum, essentially converting it into an option.
The delivery month (and year) are included in coded references to the contract, as well as the commodity chosen for the basis of the accord. There is also the matter of a margin to be paid to the futures seller upfront. Though usually no more than 10% of the market value of the underlying asset, the margin is still a serious monetary commitment for the sake of investments.
Based on the inclusion of a margin and other aspects therein, a futures contract is significantly different from the average forward contract. While both are classified as derivatives, the prices and standards of trading certain commodities in futures contracts are established by futures exchanges administration. Futures contracts, quite literally, are exchange-traded derivatives. Forward contracts, on the other hand, are bought and sold “over the counter,” and thus are not agreed upon in exchanges, but as part of private agreements.

Long vs. Short Position
By virtue of their choice to be either a buyer or seller in the futures market, investors are either taking a long or short position with regards to futures trading. In going short or long on futures, one is taking a sure but calculated risk, in essence, making a wager on the eventual outcome of the underlying asset.
A short seller borrows against the face value of the underlying asset and sells the contract, only to buy back a similar property at a lower price, ultimately coming out ahead. With the long position, meanwhile, the objective is notably simpler: to sell the  future when it increases in value, thereby using a “buy-low-sell-high” rationale to turn a profit. Thus, very basically, one in the short position anticipates a drop in the underlying asset’s value, while one who goes long expects the opposite.
In fairness, both strategies have their inherent risks. Concerning the long position, if futures fail to rise above the strike price, or worse, fall under it, at most they will lose the face value on the contract. Appropriately, this is the safer and far more frequent choice for the securities investor.
Consequently, the short position is recommended only for experienced traders and brokers and/or those with the capital to support a risky business venture. If, by the maturity date, the underlying asset multiplies in value, the investor will be forced to buy at that value. Thus, while a long seller will stand to lose no more than the strike price, the short seller’s potential losses are boundless.

Futures Options
Though most commonly futures are the contracts in which commodities are the underlying assets, in futures options the option is the financial instrument and contract and the future contract serves as the underlying asset. While this special arrangement of sorts may be disorienting to some (especially if they have no familiarity with either type of derivatives), for the most part a futures option (a.k.a. option in futures) behaves just like any normal option would.
Sellers, banking on an overall reduction in the value of the underlying futures contract, will charge a premium to buyers so that they (the buyers) may secure the rights to the contract whereupon the now-holders are anticipating the contrary to ensue.
Then again, this depends on the type of option the investor invokes. The above scenario is characteristic of the call option. 
Futures Exchanges
A potential buyer or seller of commodities cannot do anything without a forum in which to do business, so to speak. As far as trading futures contracts goes, this forum is known as a futures exchange. Futures exchanges, among other things, create a secure environment for transactions of these financial instruments that runs according to standard values of the underlying commodities and federal standards for conduct.
It should be noted that it is not as if agreements created through exchanges are forged by the eventual transactional parties themselves. Instead, the futures contract is a proverbial blank check to be signed whose rate of exchange will be locked in upon acceptance.
Trading futures through exchanges is decidedly risky, for reasons other than general security issues. Primarily, the concern of financial experts for investors’ sake is that huge shifts in the value of one’s future in possession—often for the worse—can result from proportionately minor changes in the values of goods and/or the indexed rate of futures as a whole.
Still, futures remains a sought-after and perhaps lucrative pursuit for some. Among the prominent exchanges known nationally and internationally are the CME Group, based largely in Chicago, and the International Securities Exchange, a subsidiary of Eurex. 


Futures Brokers
Whether their spare time to devote to managing their securities is slim or they are simply fearful of getting involved with the futures market, prospective investors likely stand a better chance in finding success with these financial instruments if they enlist the help of a futures broker.
In soliciting the services of a futures broker, individuals are signing up for two major functions. The first is that the broker will handle one’s investments and directly interact with the relevant parties at exchanges to try to affect transactions.
The second function, which actually goes into the initial transaction, is to use the sum of his or her knowledge and experience within this field to the client’s advantage, and for a commission, earn the investor money back and then some on his or her opening purchase. Though it should go without saying, one should be careful when dealing with futures brokers and brokerage firms.

Commodity Futures Trading Commission
Working with a futures broker only works to people’s advantage if said professional is acting in their best interests. In an effort to hold broker-dealers to a higher standard when it comes to the fairness and effectiveness of their practice, the nation’s primary line of defense, as far as futures go, is the Commodity Futures Trading Commission, or CFTC.
Created by Congress in the 1970’s, the CFTC is nominally affiliated with the Federal Government as an independent agency and is separate from the Securities and Exchanges Commission (SEC). The scope of the CFTC’s regulation, though confined to futures and options, still exceeds what it encompassed at the Commission’s incipient stages.
Broadly, the CFTC is concerned with preserving some of the key ideals in the American marketplace as a whole, namely the concepts of fair commerce and the free flow of capital as a stimulus for the economy. In tackling the fairness aspect of futures trading, the CFTC responds to allegations of fraud, abuse and other misdeeds on the part of brokers and emphasizes the necessity of full disclosure by professionals in dealing with consumer investors.
Through its partnerships with IOSCO, CESR and other international organizations, the Commission also keeps an eye on the inter-relatedness of U.S. and foreign exchanges.

Long vs. Short Position

Long vs. Short Position

There is both risk and variability inherent in trading futures. The preponderance of risk with futures contracts is related to the rate of interest set by the various futures exchanges. “Going long” or “going short” on a derivative security is a de facto choice by virtue of the borrower’s intended purpose for his or her futures. In other words, defining something as a long or short position is really just ascribing a name to the process of selecting a course of action.
With the long position, buyers are looking to secure futures for one price and sell for more money than face value at a later date. Meanwhile, taking the short position is more complicated, but may work to the investor’s advantage. In most cases, this will entail borrowing another investor’s securities and selling at that cost, only to repurchase a contract on an “identical asset” down the road for a lesser fee and buy the asset to satisfy the contract, ultimately earning the holder a net gain.
Thus, a short or long position makes either a negative or positive presumption of what the coming months and years will hold for the price of the underlying stock in a futures contract. With a short position, the expectation of holders is that a given commodity will drop in value, and therefore, they will be able to buy the share back for less than they paid in their first transaction. Expectedly, being more or less its opposite, the long position will bank on a rise in the worth of futures, and thus, a greater ability to sell to other investors at a premium. In doing so, fans of this option are employing one of the fundamental tactics of the stock exchange.         
As for what tactic between the long and short position is more common in general practice, consumers are more likely to put their faith behind the former option. This is commensurate with the advice of most financial analysts. At worst, with the long position the value of futures will go down and buyers will not be able to sell to recoup or make a net increase on their original investment. However, no more money can be lost.
As futures contracts require that holders either buy or sell by a certain date, a rise in the price of an asset will mean that short position holders are compelled to purchase the underlying stock if they cannot achieve a sale, leaving them down even more money. In all, while going short has a possibility of making the investor richer than if going long, the added danger of losing makes this option a lot more probable to end badly for the buyer.  

Be Aware of the Background Behind Futures

Be Aware of the Background Behind Futures

Futures, like derivatives as a whole, are contracts delineating terms of service of an exchange of goods for money or some other service, for which the price is set in the initial arrangement and is based off of a projected value of the underlying asset (also known simply as an underlying) specified in said arrangement. As noted, these instruments are strongly reminiscent of options. 
Futures are particularly versatile derivative securities for they may be used on both sides of the risk management spectrum. In terms of hedging, or reducing, risk, they are particularly prudent measures for producers of commodities frequently used as the source of underlying assets, as they can be used to establish the price of the product in which they specialize against potential declines in their market value.
However, in the futures market, they may be of value to the general investor and not as a mitigation of risk, but as a means of raising capital through speculation. Thus, futures market investments may make sense for the portfolio bearer in the interest of diversification.
For futures to be of genuine merit to most buyers, they will almost certainly have to precede an upswing in the value of the underlying asset in the financial markets. As noted, a future expressly states that the holder must buy or sell it upon reaching a certain date. However, if the asset to which it pertains has not gone up in worth, its use will be severely compromised.
Usually, in the futures market the goal will be to purchase a contract at a lower rate then for what one sells it. If the value plummets, a sale would mean a net loss and a purchase would probably do little for the investor unless he or she has a vested interest in the asset at hand.