Futures


Futures
Source: Tavaga

Futures are derivatives contracts made by a buyer or a seller of an underlying security with another party that is a legal obligation to buy or sell a mutually-agreed upon quantity of the security at a mutually agreed upon price by a specified date. Often, the buyer or the seller exit the contract by trading the contract itself on an exchange, instead of handling the units of the underlying securities. The Parties to the futures contract are not known to each other. 

Because futures contracts have an obligation to make good on the payment, exchanges have a daily settlement feature on these. Acting as a clearing house, they ask both contract parties to settle the contract at the market price at the end of the trading day, for each day in the duration for which the contract is valid.

Types of futures contract:-

  1. Agricultural commodities
  2. Energy markets
  3. Equities
  4. Hedge funds
  5. Foreign currencies
  6. Miscellaneous commodities
  7. Natural resources
  8. Metals such as gold and silver

Futures vs options

Futures obligate the investor to buy or sell at a later date or fulfill the terms of the contract whereas Options give the right to buy or sell the asset at a later date but there is no obligation.

Futures help to hedge against unfavourable price movements in the future but with this also comes the risk of missing on favourable price movements which means selling at a low cost or buying at a higher cost.

Futures are derivatives contracts made by a buyer or a seller of an underlying security with another party that is a legal obligation to buy or sell a mutually-agreed upon quantity of the security at a mutually agreed upon price by a specified date. Often, the buyer or the seller exit the contract by trading the contract itself on an exchange, instead of handling the units of the underlying securities.

Know more

Because futures contracts have an obligation to make good on the payment, exchanges have a daily settlement feature on these. Acting as a clearing house, they ask both contract parties to settle the contract at the market price at the end of the trading day, for each day in the duration for which the contract is valid.