FUTURES

CONCEPTAgreement to buy or sell given asset on a

future date.Can be used by speculation or risk

management.

FUTURES CONTRACTS

Detail the quality and quantity of the underlying asset.

They are standardized to facilitate trading on a futures exchange.

May call for physical delivery of the asset, while others are settled in cash.

CHARACTERISTICS

1. They are traded in organized exchanges.2. Credit risk is eliminated. Both parties

deposit a portion of the contract with the clearing house. 

3. Both the buyer and seller are bound by the contract terms and are expected to honor their end of the contract.

COMMODITY FUTURES

Buyers use these to avoid the risks associated with the price fluctuations of the product or raw material, while sellers try to lock in a price for their products.

WHO DETERMINATE THE COMMODITY PRICES?A commodities futures price is determined primarily by the supply and demand for the commodity in the market. There are many economic factors that will have an effect on the price of a commodity.

FUTURE MARKET

Market in which participants can buy and sell commodities and their future delivery contracts. A futures market provides a medium for the complementary activities of hedging and speculation.

Futures Fundamentals: The Players

HEDGERS SPECULATORS

Buys or sells in the futures market to secure the future price of a commodity intended to be sold at a later date in the cash market. This helps protect against price risks.

Buying a contract low in order to sell high in the future . Want to increase their risk and therefore maximize their profits.

The players in the futures market fall into two categories 

Economic Importance of the Futures Market

Price Discovery Factors such as weather, war, debt default, refugee displacement, land reclamation and deforestation can all have a major effect on supply and demand and, as a result, the present and future price of a commodity. This kind of information and the way people absorb it constantly changes the price of a commodity.

Economic Importance of the Futures Market

Risk Reduction  

Risks are reduced because the price is pre-set, therefore letting participants know how much they will need to buy or sell. This helps reduce the ultimate cost to the retail buyer because with less risk there is less of a chance that manufacturers will jack up prices to make up for profit losses in the cash market.

FINANCIAL FUTURESCurrency futures

A contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date.

Futures based upon currencies are similar to the actual currency markets

Euro to US Dollar exchange rate, or the British Pound to US Dollar exchange rate.

INTEREST RATEA rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal.

For example, if a lender (such as a bank) charges a customer $90 in a year on a loan of $1000, then the interest rate would be 90/1000 *100% = 9%.

STOCK FUTURES

Stock Futures are financial contracts where the underlying asset is an individual stock.

Stock Future contract is an agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller.

HOW THE FUTURES WORK?