A futures contract is a transaction concluded between two counterparties
26 / April / 22 Visitors: 65
A futures contract is a transaction concluded between two counterparties (buyer and seller) in an organized and regulated market called the "futures market".
A futures contract is an obligation to buy (for the buyer), sell (for the seller) the underlying asset at a price set today, but for delivery and settlement in the future.
The underlying asset can be a physical product (goods), a financial instrument (stocks, bonds, interest rates, exchange rates) or a stock or climate index…
The mechanism of futures markets.
Originally developed for agricultural markets, the main role of futures contracts is to minimize the risk of losses associated with fluctuations in the prices of the assets they refer to (the role of "hedging").
Thus, a corn producer who fears a decline in corn prices by the time of harvest can sell corn futures in order to make sure of his selling price in advance. Of course, he will pay for his contracts all the more expensive, which will require a high selling price, and the forecasts for a decrease are significant.
Opposite the specialists in the basic product (in this case, the farmer) are other operators who have other interests or expectations. They may be pure speculators who intervene in the hope of profiting from the market movement.
They play an important role in ensuring the smooth functioning of markets, as they contribute to increased liquidity by allowing large orders to be executed with minimal price fluctuations.
Thus, at any moment, futures quotes represent a consensus of opinions as to what price levels for the underlying product have been reached on a certain date.
Delivery or disconnection of a position.
In the futures market, it is very good to take a sell position before buying, since settlement, but especially delivery, occurs later in the future.
In order to fulfill his sales obligation, then it will be enough to purchase the basic product on the "physical market" before the maturity stipulated by the futures contract so that he can deliver it. If you do not want to deliver the product in the end, you definitely need to "buy off" your trading position before the maturity date, proceeding from the position to purchase on the same futures contract.
Because contracts traded on the futures market are standardized (size, maturity, etc.), they are "interchangeable", which makes it easier to buy or resell during their lifetime. In this case, the position is canceled, and the investor is released from his original obligations.
In practice, few interested parties retain their positions until they appear on the futures market. They repay their position before maturity: a sale followed by a purchase or a purchase followed by a sale of the same underlying asset results in a profit or loss.
Thus, even when it comes to commodities, the futures market is more like a financial market (used as a hedging or speculation tool) than a real physical market.
In addition, a number of futures contracts provide for termination not by "physical" delivery of the underlying asset, but by cash repayment of the profit (or loss) received (e). This is especially true for stock index futures contracts.
Futures contracts are called futures in Anglo-Saxon markets. When it comes to non-standardized contracts concluded outside of organized markets, we are talking about forwards.
The system of financial guarantees.
In regulated markets (such as the Euronext derivative market), futures trading uses the services of a clearing house.
A clearing house is a financial institution that registers transactions and guarantees its participants the successful completion of transactions. It systematically interacts between the buyer and the seller, whose sole counterparty it becomes. This allows each party to subsequently make a reverse transaction (sale or purchase) without having to find another part of the original market or obtain its consent.
In order to guarantee its financial security and the security of its stakeholders, the clearing house (which is called LCH SA for Euronext-derived markets) requires a hedging deposit (or a security deposit) from financial intermediaries that are its members, designed to cover the risk of problems for the company.the investor in case of an unfavorable price change.
Every evening, the risk is overestimated depending on the price changes at the auction and an additional "margin call" is made to operators whose risk has increased.
The corresponding amounts are paid through a member of the clearing house to the latter. The amount not less than the amount requested in the COMI is blocked on the client's account via.
To go further.
Is it a legitimate intermediary in the decryption markets to enrich himself by doing finance? Transcripts of economic sciences by teachers.
Hello, very interesting article, Thank you. I had a practical question at the collateral level. Example; a security deposit of $5,000 for a future contract with the US index on the same day the price drops to $6,000
Will my position be automatically resold by the broker with a loss of $5,000 due to lack of funds? Or can he charge me $ 1,000 as a negative ?
And thank you for your support ! Futures are particularly risky products of speculation. This is due to the fact that the risks of loss are high and are not limited to the requested security deposit (usually from 5 to 10% of the future value). In case of large losses, the financial intermediary may ask you to increase the value of the collateral with the help of so-called "margin calls". In addition, the rules regarding these margin calls may differ from one financial operator to another: it is necessary to request information in each specific case. However, as a rule, the position is automatically sold through financial intermediaries when the client is unable to cope with margin calls, and this is done to limit losses.
What is the relationship between the prices on the futures markets and the prices of the underlying asset on the spot market?
Is there any causal relationship between them or is the futures market purely speculative, without consequences for the real (spot) market?
These two stages are indeed extremely interconnected. You can choose to buy a financial asset directly, especially stocks, but you can also choose to buy a futures product, the valuation of which will depend on many factors that are often very difficult to predict. The difference between the spot price and the futures price is mainly due to the risk-free rate at which the money needed to purchase the asset can be placed before the expiration of the relevant futures contract. Thus, a trader in the markets can directly buy an asset and hold it until the expiration of the contract, or an investor can, through a futures contract, commit to buy an asset after the expiration of the contract. In any case, the investor will own the asset after the expiration of the contract. However, with the first option, the investor would have to lay out his money much earlier to buy a financial asset. This early outflow of money is a lost profit for our investor, who could well place this money at a risk-free rate and receive interest before the expiration of the contract.
Hello, what are interest rates on futures contracts for and why do I need to pay or receive them? I look forward to your return.
In futures contracts, you will need to pay a margin call, which is not a percentage. Such a margin call, which guarantees the security of the transaction, will be requested from you at the beginning of the operation or at the scheduled expiration date of the futures contract if you want to postpone your position (in addition to various operating expenses).
Please, I wanted to know the connection between futures contracts and risk management and thank you very much.
Futures operations are used to hedge certain trades. For example, I have an action. I am afraid that its rate will decrease. I sell it on time at a pre-set price (does not depend on price changes).
Why not sell it directly ? It's not clear at all.
Hello, an investor may be interested in not selling the shares in question immediately for various reasons (the desire to remain a shareholder in order to receive dividends or be able to vote at a general meeting, the lack of alternative investments, etc.). In general, futures contracts allow separating a company from others. the date of signing the contract and the date of its execution allow economic agents to better cope with various risks. With best wishes.
Very interesting article! A small question, we can resell the futures contract before the expiration date, but if the buyer cannot resell it, is he obliged to fulfill his obligations under the contract? Is it impossible to cancel a futures contract ? Different from put/call ?
Unlike options, a futures contract is actually a firm commitment of two parties (buyer and seller). It would be advisable to accurately verify the terms of the futures contract, but a priori it can be resold before the expiration date, unless two investors agree.
Thank you for your article. I would like to clarify one point regarding speculation on futures contracts. Let's take the example of a corn producer who is negotiating a "future" with a buyer. How does the speculative mechanism work (when it intervenes)? Can an institutional investor (for example, a hedge fund) decide to buy a futures contract from the first buyer - and multiply such purchases with other "futures" for agricultural products – in order to increase prices for new commodities? On the other hand, is it possible to carry out a short sale of these futures contracts (to place bets on a decrease)? After all, what does the " physical" delivery of corn become when a futures contract passes into the hands of various buyers?
Hello, a speculator can indeed buy a large number of futures contracts to raise prices, but in practice it is very difficult (and sometimes illegal) to influence prices, since this requires significant amounts. This is due to the fact that short sales allow you to place bets downwards. Physical delivery is carried out on time. If a futures contract is traded before the maturity date, this does not affect the physical delivery, it is the owner of the contract at the time of delivery expiration. Sincerely, the financial team is for everyone.