FutureWhat are Futures?
Futures are standard (non-customized) contracts andcan be trade on regulated markets.
The contract is defined as "standard" as each element is fixed and the counterparties can’t change it. Buying futures means to buy the underlying asset on a chosen future date (products or financial instrument) at a predetermined price.
The underlying assets involved in the exchange are as many as there are futures for different stock indexes in the world, as well as futures on major currency pairs and key interest rates. As far as Commodities are concerned, futures are particularly interesting (as in the hedging activities we will see later) and for this reason a large number of contracts are available for almost all goods produced.
Who are the players involved in futures market?
Futures contracts are used by two categories of market participants: speculators and hedgers.
In the vast majority of cases, futures transactions are speculative and close before the expire date with the purchase/sale of an opposite sign contract and are often carried out in the shortest term. Sometimes the whole operation (sale / purchase or vice versa) is carried out within minutes.
Producers or buyers of goods (cereals, meat, precious metals, non-iron metals, colonial goods, timber, energy products, currencies, etc.) use futures with the hedging method to cover the underlying asset risk and keep track of any fluctuations in the price at which the goods will be sold or purchased in the future. In this case (which represents a very limited part of the whole) they are actually delivered on expiration.
the Analyst's answerJean Grossett - Financial analyst
A simple example of a futures contract can be based on an assumption that you entered into a contractual agreement with your internet service provider to offer you a 10GB data plan every month for the next one year. This can be likened to a futures contract because you have agreed to receive a service at a future date, so if some economic factor affects the price of the service such as an increase, you have been able to successfully reduce your risk. It is this contract and not the internet connection that can be sold in the futures market. In the futures market, the internet service provider is referred to as a holder of short position, while the subscriber (buyer) is a holder of long position. Unlike stock market where gains or losses are not realized until the investor sells his stock or covers his or her positions, futures positions are settled on a day to day basis, meaning that profits and losses are debited or credited to a participants account on a daily basis.
In order to reduce risks of crashing wheat prices, a farmer may enter a short hedge contract, while a bakery owner may enter into a long futures contract, to hedge against rising wheat prices. Hedging is also very popular in highly volatile markets such as gold, silver, and the popular bitcoin digital crypto currencies. Amazon accepting bitcoin as a mode of payment may decide to enter into a long futures contract thereby reducing their risks.
Other participants in the futures markets are speculators, who are in it for the profits. Unlike hedgers who are into the futures market for risk reduction, speculators are looking forward to anticipating and riding the volatile price waves of the market.
the Manager's answerRobert Danvil - Investment Manager
Buying a futures contract involves carrying out a transaction for something that has not yet been produced at an agreed price. Participants i.e. buyers and sellers enter into future contracts for two major reasons which includes hedging and speculating. In the futures market, pricing can be made by open cry similar to traders in the pit of the Chicago mercantile, or it can be done electronically. In fact the emergence and popularity of the computer and internet made the open cry system have little or no patronage.
Futures market like other margined markets, are highly leveraged, hence it is very important to understand the mathematics of how leverage operates under the hood, with respect to margin call. To invest in futures contract, it is possible to manage the account by yourself, subscribe to a managed account by a professional broker, or by joining a commodity pool.
The Futures markets in the US are monitored and regulated by the commodities futures trading commission (CFTC) and the National Futures Association (NFA).
the Mentor's answerNicholas Kihn - Forex coach and mentor
The futures market in North America came about from a necessity to strike a balance between supply and demand. Often time farmers would bring their harvest to sell in the markets, only to find out that there is excess supply for the available demand thereby leading wastage. On the other hand, when another crop such as grains were out of season, price of the finished products made from it sky rockets.
A central market place was later established in the mid-nineteenth century for farmers to bring their harvests (commodities) to be sold either on immediate delivery i.e. spot trading or forward delivery. Forward delivery of farmers commodities in the form of contracts were the early forms of the futures contract. The futures market today has evolved beyond agricultural commodities, but also into Security futures, and Treasury bonds. Throwing modern technology into the mix in the form of internet and all, the modern day futures market has become a hub for manufacturers, importers, exporters, farmers and speculators.