Futures Contract 

Futures is a kind of agreement between the seller and the buyer on a future sale of a certain asset for a predetermined price.

The concept of futures appeared in the USA in the nineteenth century. At its core lies the postponement of the inevitable payment for the purchased goods. Initially, this product was agricultural products, the prices of which were traditionally very volatile. The concept of contracts for the upcoming transaction was a type of insurance against sudden changes in prices, which allowed to maintain stability and reduce risks.

This concept has been preserved, but the number of assets for which futures contracts are concluded has increased markedly. The contract involves two parties: the buyer and seller. They conclude a contract under which one party agrees to buy a certain asset from the other party for a specific price and before the indicated date. An asset can be almost anything: from raw materials and food products, to securities. Unlike an option, the futures owner is required to comply with his part of the contract and acquire the asset.

Futures (futures contract) has several differences from similar contracts:

• Assets to which a contract is entered into must not have predictable short-term price movements.

• The buyer and seller try to minimize risks in the process of concluding a contract.

• During the formation of the transaction, insurance may be added, which will be an additional factor in favor of compliance by both parties with their agreements.

• The presence of a mandatory intermediary - the exchange, which provides services for a fee.

• A futures contract does not always imply the delivery of an asset to a buyer.

When concluding a contract, its participants pay a certain amount - a deposit margin, which acts as a kind of guarantee that the contract will be fulfilled. If a transaction is broken or one of the parties fails to fulfill its obligations, the margin acts as compensation for the losses incurred.

In addition to the main benefit - a pre-agreed transaction for a roughly set price, futures are also of interest to traders who prefer to speculate. There are no rules that would prohibit the resale of contracts, but this can only be done during the specified term of the contract.

Also, a very important point is that the issuers of the futures are the traders themselves, but they have no say in exactly which futures can participate in the transaction. Such a decision is always made by the exchange, which provides a trading platform. In addition, exchanges undertake monitoring of participants in the futures contract and solve technical problems.

Basically, all futures are divided into two main types:

1. Settlement Futures
2. Deliverable Futures

Settlement futures - futures in which there is no delivery of the asset to the buyer. Popular futures with transactions with valuable assets, for example - stocks. When closing the transaction, the settlement is in cash.

Deliverable futures - futures that include the delivery of an asset. It is used both with valuable assets (stocks, for example), and with food and non-food goods.

Since there are different exchanges that provide their trading platforms for concluding futures contracts, there are special futures that are tied directly to a specific underlying asset.

Currency Futures. One of the first futures contracts. Initially, they relied on gold reserves, but over time they switched to other valuable assets: bills, stocks, etc. They work similarly to commodity contracts.

Currency futures are divided into two categories:

• With the dollar (major currency pairs).
• Without a dollar (cross rates).

Gold Futures. Distributed on specialized exchanges that work only with gold, as an extremely stable and liquid asset. Contracts replace the need for direct transfer of the asset, that is, no one transports gold, but all opportunities remain to earn money on price speculation.

Oil Futures. Another popular futures contract with speculators. Thanks to settlement futures, many traders have the opportunity to earn on oil price surges, without the need to somehow transport or sell it. When dealing with this type of futures, you need to carefully monitor the news of the commodity, financial and political markets, because jumps in commodity prices occur against the background of any news. Since brokers label different types of oil differently, it is important to clearly understand which grade is being bet on.

To simplify the procedure for concluding futures contracts and increase their liquidity, specifications were introduced that are required to be present in futures.

Key Specifications:

1. The name of the futures contract.
2. The abbreviated name of the contract.
3. Type of futures. It can be either deliverable or settlement.
4. Duration of the contract.
5. The value of the underlying asset that is involved in the transaction (contract size).
6. Delivery date.

There are many different exchanges that act as intermediaries in the conclusion of futures contracts. Different exchanges offer the opportunity to trade on different types of underlying assets and have their own inherent features. Due to the popularity of settlement futures, exchanges are increasingly providing a wide range of underlying assets for trading.

The main futures exchanges:

• Chicago Mercantile Exchange (CME) - the famous Chicago exchange. It is characterized by contracts for currency, interest rates, indices, meat and wood.
• Chicago Board of Trade (CBOT) - a major US stock exchange. Conducts trading with precious metals and indices.
• Euronext is a European stock exchange trading in stocks and bonds, currency and agricultural products.
• Eurex is a popular Swiss exchange. Currency futures, options, stocks and index futures trading.
• MICEX - a large Russian exchange where commodities and currencies are traded.

Trading futures contracts come with the following benefits:

• The most popular and liquid market.
• An abundance of trading instruments.
• Ability to diversify an asset portfolio
• No need to transport goods

As you can see, futures trading is convenient and attractive for many traders. Those who wish to participate need experience, patience and understanding of the goal they wish to achieve.