Friday, 29 November 2019

Unit 4: Introduction to Future Contracts


                             Unit 4: Introduction to Future Contracts 

The futures market is a global market place, initially created as a place for farmers and merchants to buy and sell commodities for either spot or future delivery.
This was done to lessen the risk of both waste and scarcity.
Rather than trade in physical commodities, futures markets buy and sell futures contracts, which state the price per unit, type, value, quality and quantity of the commodity in question, as well as the month the contract expires.
The players in the futures market are hedgers and speculators.
A hedger tries to minimize risk by buying or selling now in an effort to avoid rising or declining prices.
Conversely, the speculator will try to profit from the risks by buying or selling now in anticipation of rising or declining prices.
Futures accounts are credited or debited daily, depending on profits or losses incurred.
Daily settlements reduce the default risk of futures contracts relative to forward contracts.
Currency future is the price of a particular currency for settlement at a specified future date.
Today, there are financial futures on debt instruments called interest rate futures, foreign exchange rate called currency futures and stock market averages called stock index futures.
Agricultural futures contracts: These contracts are traded in grains, oil and meal, livestock, forest products, textiles and foodstuff.
Commodity Future Contract: An agreement to buy or sell a set amount of a commodity at a predetermined price and date.
Contract size: The amount of asset that has to be delivered for one contract.
This is also called as the lot size.
Currency Future: Currency future is the price of a particular currency for settlement at a specified future date.
Mark to Market: The accounting act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value.
Metallurgical futures contract: This contract includes genuine metal and petroleum contracts.
Among the metals, contracts are traded on gold, silver, platinum and copper.
Financial Derivatives   Offset: Elimination or reduction of a current long or short position by making an opposite transaction of the same security.
Portfolio: The group of assets - such as stocks, bonds and mutual funds - held by an investor.
Stock index futures: These futures contract without actual delivery were introduced only in 1982 and are the most recent major futures contract to emerge.

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