Forex Teach

Futures is a term that we will increasingly be seen on promotional banners or advertisements brokerage firms. But what a futures contract and how they trade. Try to understand.

The term futures contract comes from the English Future, which translates to the future. In fact it is a contract which contains a complete description of the conditions to buy or sell a standard quantity of the goods at the stipulated time in the future at a price fixed at the date of its signing. The object of the contract (gold, oil, silver, steel, wheat), called the underlying asset. The advantage of the futures contract to the usual contract for the supply of prisoners between buyers and sellers directly, is that at the time the contract is no transfer of any underlying asset or payment for it. All that is required is pay a margin, which serves as the cash collateral required to enter into a futures contract.

For example, consider a situation in which the manufacturer plans to purchase wheat flour for the next year. If you buy wheat for the earlier, there are additional costs associated with storage. At the same time, closer to the season of harvest, prices may rise and "miller" may go beyond the planned budget, which could negatively affect their business. The way out of this situation is to buy on the stock exchange futures contract for corn at the current market price, and delivery of and payment under the contract will be made in accordance with the terms of the contract. If the price goes down, the manufacturer can sell the futures contract in advance, and at the right time to buy at market price.

Based on the fact that futures contracts are traded on the stock exchange, trading for them is based on real market prices. First Futures Exchange was opened in 1848 in Chicago and was called the Chicago Chamber of Commerce - CBOT, Chicago Board of Trade. Besides her, in the largest exchange group in the world is the New York Mercantile Exchange (NYMEX, New York Mercantile Exchange) and its division - New Yorks Commodity Exchange (COMEX, Commodity Exchange). In addition, futures are traded on the Intercontinental Commodity Exchange (ICE, Intercontinental Commodity Exchange), which includes the New York Chamber of Commerce (NYBOT, New York Board of Trade) and the European Exchange (EUREX).

Interestingly, that less than 2% of futures trading on the Stock Exchange, ending the supply of the underlying asset. The rest of the transactions accounted for speculative trading or to transactions intended to limit the financial losses caused by price changes in their assets.

Futures trading scheme, similar to the ordinary exchange transactions in securities, with a few differences. Just like with stock trading, the trade involved three parties:

• Exchange

Ensures smooth functioning of the market. He is the guarantor of the implementation of the prisoners in the framework of its transactions.

• Broker

A legal entity that has the appropriate license to participate in bidding on the stock exchange. The main purpose of the broker is to provide access to the stock trading to private investors, due to which the profits in the form of commissions for providing brokerage services.

• Trader

Private person or legal entity traded on an exchange through a broker, and has as a goal to profit from speculative trading and financial risk insurance.

A trader can act as a seller or buyer. If we consider the broker as a tool to make a transaction, the transaction script looks like this:

Buyer accepts the obligation to the futures contract to buy the goods at the stipulated time. Seller of a futures contract undertakes to sell the goods at the stipulated time. Exchange is a guarantor of performance of the seller and the buyer of these commitments. Both sides must fulfill their obligations in relation to each other at a particular time in the future, at a price fixed at the time of the transaction.

To organize futures trading, for each of the underlying assets has been introduced a number of standard variables: the standard of the underlying asset quality requirements of the goods, the delivery time.

Due to the high degree of standardization of futures contracts, the buyer always knows exactly what he buys, the seller knows what he needs to deliver on time, and they both know when will the supply and the price they will pay / receive in the transaction. In order to separate the quality of several types of the same product (different grades of oil, steel, varying degrees of flexibility and strength) for each type of contract there is a specification. This is a legal document that details the amount of goods on a contract, delivery, accurate description of the goods delivered and the terms of trade.

Depending on how the calculations are made on the expiry of the contract are:

Deliverable futures - for delivery of the underlying asset at maturity is known to us from kontrakta.Esli Yuvelirova Ivan deliverable futures contract, he will receive the purchased gold in the warehouse, stipulated in the specifications, after 3 months of the date of expiration of the contract.

Current futures - delivery of the underlying asset is not performed. At the expiration of the contract (settlement date) the parties shall be held only cash payments based on the difference between the current price of the underlying asset and the price specified in the contract.

Whether the trade in futures contracts for the ordinary citizens? Let's take a look. A contract for the supply of oil, for example, costs 50 000 U.S. dollars. To enter a futures contract to buy oil, we need to make a deposit margin, which is only part of the value of the underlying asset. In our case, the margin will be 7000 U.S. dollars. I doubt that having an average salary, anyone can afford to risk the loss of the scrip, if his expectations are not met. At the same time, I want to trade futures with real stock prices, followed by easy to follow and for which there are many analysts. In order to trade in futures contracts has been made available to the masses created a financial instrument as a CFD (Contracts For Difference) - Contract for Difference. In fact, the contract for difference is an agreement between two parties to pay the difference between the contract price of the futures expiry.

Consider the example of buying CFD on futures, the underlying asset of which is gold. This means that at the expiration of the contract, will not need to buy gold. In the case of cheapening the price of gold during the period of the contract we will pay the price difference to the other party with respect to the price on the day of the contract for difference, ie we get a loss. If the price goes above, the other party will pay the difference to us, and we get a profit.

In this case, the use of CFD can split the amount of the asset. This allows you to trade part of the futures contract, and as a consequence, reduce the risk of price changes on futures. Consequently, the trade CFD on futures can afford not only large investors, but mere mortals, having low start-up capital.