Futures are considered one of the fastest growing types of financial sector investments . These contracts are highly liquid and offer a variety of trading strategies.
A futures contract to buy or sell an asset is made on a specific date in the future at today’s market price. Basic assets (subject of the contract) for the conclusion of such contracts may be stocks and bonds , commodities and currency .
How it works?
A farmer planted wheat in the spring. While it is growing, the farmer agrees in spring that in the fall he will sell the wheat crop at the current price of 100 rubles.
At this time, weather forecasters predict a good summer and excellent harvest in the fall. It is logical to assume that in this situation there will be a lot of proposals in the autumn, this may provoke a fall in prices. But the farmer is not interested in selling wheat in the autumn at 40 rubles per ton.
Therefore, in the spring he agrees with several buyers on the supply of wheat in six months at the current price. Thus, the futures contract protects the interests of the seller and fixes the current price of the goods, which will be shipped later in the stipulated time.
If you look into history, then the spontaneous European, American markets were based on an oral agreement between merchants and suppliers of goods. With the advent of writing, the first paper contracts arose. Some of them date back several centuries BC – archaeologists have found cuneiform tablets at the excavations in Mesopotamia, which in essence can be called a kind of futures pattern . More modern financial instruments were formed in Europe at the beginning of the XVIII century .
One of the popular futures markets is the FORTS derivatives market , which belongs to the Moscow Stock Exchange . And his most universal instrument is futures on the RTS index .
What you need to know about futures specification
This is the document that enshrines the exchange . It contains all the agreed terms of the futures contract.
These include :
– Name of product;
– indicate the type of contract (settlement or delivery);
– how many units of the underlying asset accounted for one futures;
– terms of treatment;
– marked the date of delivery;
– the minimum allowable change in price (step);
– the price of the minimum step.
More detailed information on specifications with short futures codes is available on the Moscow Exchange website .
Types of futures contracts
Deliverable , according to which the underlying asset is delivered . It’s very simple – the seller and the buyer agreed to conclude a deal in six months for the supply of gold at the current price.
Settlement futures delivery is not provided. When the contract expires, the parties to the contract recalculate the profits and losses, charge and debit the funds.
Suppose you bought 10 futures on the Russian RTS index, because you expect the index to grow by the end of the futures trading period. When this period ends, you will simply receive a profit, while no one has shipped any goods to anyone.
During the term of the futures circulation contract can be bribed or resold. When the term expires, all owners of the contract must fulfill their obligations.
The futures price is the current value of the contract. While the paper is in circulation, it may change.
Attention! Do not confuse the value of the futures contract and the price of the underlying asset. Although one directly depends on the other.
It may happen that the futures price will become more expensive or cheaper than the price of the underlying asset. Therefore, the current price form depending on the circumstances that are possible in the future in one direction or another.
What is the advantage of futures trading:
- a wide choice of instruments that can be traded on various financial exchanges of the world, which makes it possible to diversify your portfolio widely;
- futures have high liquidity. This allows different strategies to be applied;
- here the commission is lower than in the stock market.
And here’s a cherry on the cake – warranty (GO) . When you buy a futures contract, you invest money at times less than in the purchase of the underlying asset . The exchange charges you a certain amount as collateral, which corresponds to 2-10 percent of the price of the underlying asset . In other words, you buy futures in the amount of 100,000 rubles, and you pay only 10,000 for them, which is 10% of 100,000.
The amount of warranty is not fixed . It can change even after the purchase of futures. Therefore, you will have to control the status of your position and the amount of GO. Otherwise, the broker may close your position with a slight increase in the GO, when you may not have additional funds in your account.
What trading strategies are possible when trading futures?
Such a variant of financial instruments gave rise to agriculture. In order to somehow insure their income, farmers entered into contracts for the supply of crops in the future, but at the prices fixed now. Thus, hedging reduces risks in investment operations.
How is this applicable in trading?
Any experienced trader will always strive to protect his assets when there are significant fluctuations in the foreign exchange market. Suppose in a month you are planning to make a profit in dollars and would not like to risk if the currency rate suddenly changes. And you use futures for a couple of ruble / dollar .
In numbers it will look like this. You are waiting for 10,000 dollars in 2 months. The current exchange rate suits you completely. To insure against changes in the exchange rate, you enter into a transaction for the sale of 10 contracts with an advantageous date of performance. That is, you fixed the current market rate, and if it changes, your account will not suffer, since the position will close immediately after receiving real money.
Futures are popular speculators because of their liquidity and big leverage. Trader speculator makes a profit on the difference in the price of buying and selling. At the same time, it has the maximum potential for profit with minimal retention of open positions. Add to that reduced , compared with the stock market, the commission .
The meaning of arbitrage operations comes down to the fact that market participants make a profit when making deals on spreads .