Futures, along with swaps and options, are classified as derivative financial instruments. They are a standardized exchange-traded contract for the purchase and sale of the underlying asset.
Instructions
Step 1
Futures contracts are an obligation to buy (sell) a specified number of commodities at a fixed price on a specified date in the future. They first appeared in the 1840s at the Chicago Chamber of Commerce. At that time, grain was the commodity sold (it is also called the basic asset). Today, the list of underlying assets is quite extensive. It includes gold, oil, timber, currency, cotton, steel. The widespread use of futures contracts was facilitated by fluctuations in commodity prices, which were observed in the 50-60s of the 20th century.
Step 2
Forward contracts served as a prototype for futures contracts. They are a contract for the future supply of goods on pre-agreed terms. The difference between forward contracts is that they are individual and are not traded on exchanges. The contracts are not standardized, their terms are negotiated by the parties bilaterally.
Step 3
Futures have three functional purposes. Their main purpose is to determine (fix) the future price of the underlying asset. Also, futures contracts are used for the purpose of insurance against financial risks (hedging), as well as speculation to profit from the difference between the buy and sell prices.
Step 4
Futures have two key dimensions. This is the date of execution (the date of the purchase and sale transaction), as well as the subject of the contract (raw materials, securities, currency). There are also additional parameters such as size and unit of measure (for example, 1000 feet, 100 barrels), contract quote (for example, dollars per 1000 barrels), margin size. So, in relation to oil, the standardization of futures means that 1 contract gives the right to buy 100 barrels of oil. Typical delivery times are March, June, September or December.
Step 5
Owning a futures contract does not only mean taking over or delivering a commodity in the future. Distinguish between delivery and settlement futures. In the first case, on a specified date, the buyer is obliged to purchase and the seller to sell a specified amount of the underlying asset. Settlement futures assume that settlement between participants is in cash between the price of the contract and the price of the underlying asset at the date of sale.
Step 6
They also distinguish between such types of futures as long futures (allows you to get income only when the price of futures rises), short futures (brings income when prices for futures fall), short and long hedges (insures against falling or increasing prices for futures). Based on the variety of the underlying asset, such types of futures as foreign exchange (a contract for the supply of currency) or futures on stock indices (for example, Standart & Poor's 500) are distinguished separately.
Step 7
Today, futures contracts are traded on the Moscow Exchange. Globally, the leading exchanges are the Chicago, New York Mercantile Exchange, and the London International Financial Futures and Options Exchange.
