The futures contracts that are traded in the futures markets are standardized by these exchanges. Specific features of the contracts such as the nature of the underlying assets, their quantity, the pricing and the delivery date are delimited by the futures exchanges. The exchanges also specify the currency in which the transaction is to be made...
A futures market is an auction market where traders buy and sell futures contracts for delivery on a specific future date according to the terms of the contract. Futures markets are also called futures exchanges.
Well developed and effective futures markets facilitate transactions without impacting the underlying assets. These markets attract hedgers who are inclined to minimize the risk. They also encourage competition among the traders who come with varied market information and price judgment. A large number of traders participate in the buying and selling activities. These activities are based upon the global information pertaining to trends in demand and supply...
Often, some investors trade in commodity futures to get rich quickly. Such investors are prone to losing money as they take big risks which might go against them. Trading in commodity futures is risky if it is treated as merely a speculative market. It is advisable for investors to exercise patience while making investing decisions.
Commodity futures aim to transfer risks associated with the ownership of a commodity. The commodity may be anything, from wheat to a foreign currency. At the time of the futures contract, the actual commodities do not physically change hands. The contract is legally binding for the transfer of commodities at a future date, which is specified at the time of entering into the contract. Also, at that moment itself, the price at which the delivery would take place in the future, is decided...
Commodity futures trading are done in an organized futures market. Unlike other investments such as stocks and bonds, trading in futures does not involve the actual possession of the commodity. All an investor does is to speculate on the future direction of the price of that commodity...
A well organized and efficient commodities futures market is acknowledged as helpful for the price discovery of commodities that are traded in it. Such a market facilitates the offsetting of transactions without actually impacting the physical goods...
When commodity futures contracts are traded with high leverage, they fall in the high risk area and get close to speculation. However, such kind of trading can also be done using low leverage to provide favorable payoffs. This technique would place futures trading in the low risk spectrum.
The currency futures market is also used by some companies for hedging. These companies either purchase currency futures for their future payables, or sell the futures on currencies for their future receipts. Speculators may also buy or sell futures on a foreign currency as a protection against the strengthening or weakening of the US dollar. So, speculators may be able to earn profit from the rise or fall of these exchange rates.
Currency futures or forex trading are fraught with high levels of risk. A small unfavorable fluctuation in the exchange rate may result in loss of an investor’s entire deposit. Investors are advised to enter into this field only if they have in-depth knowledge of how risky this segment of financial market really is...
Currency futures:- are legally binding contracts between buyers and sellers to buy or sell a specific sum of currency in exchange for another at a specified exchange rate. Delivery of the same is meant to take place on a specific future date. Currency futures are also known as forex futures or foreign exchange futures. Currency futures are traded in specialized futures exchanges...
Currency futures were developed after 1971, following the collapse of the Bretton Woods system of fixed exchange rates. The currency futures market is growing in popularity, as the main participants of this organized market comprise bankers, importers, exporters, multinational corporations and private speculators.
The main risk involved in trading futures is that it is a highly speculative market.
Among the benefits of trading futures are:
There are two aspects that distinguish futures trading from trading in stocks or bonds.
Futures trading is a form of investment involving speculation of the price of a commodity in the future. Futures are derivatives bought or sold on a futures exchange. They are contracts to buy or sell a particular amount of a commodity at a predetermined price on a specified date in the future. Trading futures is not for newcomers to investing, since it involves high risk.
The majority of futures trading is speculative and involves cash settlements (also known as paper investing), rather than for the actual physical delivery of the commodity. Online futures trading is not as popular as online stock trading, since the former is substantially more risky.
Till the 1980s, futures trading comprised of only a handful of farm products. The popularity of the futures market subsequently rose and in the 21st century it involves a huge variety of commodities, including:
The futures market is not for the novice trader. It is critical that you check your financial situation, investing goals and risk appetite before venturing into futures trading.
When the price of the underlying commodity in a futures contract is higher than the spot (immediate) price, the situation is known as contango. When the price of the underlying commodity for future delivery is lower, the situation is known as backwardation.
The price of a futures contract can be calculated with the following formula
where,
F(t) = future value
S(t) = present value
t = time
T = maturity
r = rate of return..
The common features of futures are:-
Commodity options may promise huge returns on a small margin. However, such high returns are not always certain. Note that small fluctuations in the price of the underlying commodity may induce broad movements in the prices and hence result in great losses...
Commodity options are agreements between buyers and sellers that give buyers the right (but not the obligation) to buy or sell a certain amount of commodity at a specified price on a specified future date. Any commodity, such as grain or crude oil, can be used as the underlying asset for a commodity options contract...
A buyer of the commodities option has the right to buy or sell the underlying option before the contract expires. However, the right to exercise the option of either buying or selling does not put the buyer under an obligation to exercise this option. At the same time, the seller is bound to buy or sell the underlying. To exercise this flexible option, a buyer pays a premium to the seller of the option...
Commodity options are of two types: call options and put options. In a call option, the buyer of the option has the right to buy the underlying commodity at a prescribed price on a date that is specified for the future. Meanwhile, a put option provides the right to sell the underlying commodity at a prescribed price at the prescribed future date. The price that is fixed to buy or sell on a specific date in the future is known as the strike price.
