A forward contract or futures is simply a standardized contract to buy or sell a specified underlying asset at a future date at a specified price. The underlying derivatives can a commodity like gold, silver, crude oil and rice or with stocks, bonds, indexes, interest rates, currencies, and others.
Futures contracts are used primarily in speculation as hedging instruments e. Coverage is how the measuresInsurance against price risk with a physical place to protect the market position. While the market's future at risk hedgers eliminating speculators take the risk of making a profit.
Coverage
Cover is made from a market and facing the same position in the futures market, which in the physical. Suppose you are a farmer and is expected to collect a ton of barley within three months. But I believe that the current spot market price of barleysatisfactory and if the price falls, may affect your return. You are in the price after three months of blockade. It is possible that a short position in the market for barley futures t 1. I mean, they sell futures contact barley to the value of your production. This will give you a profit if the price of barley futures fall, which in turn depends on the spot price of barley. So you can compensate for its losses resulting fromSell your production of barley on the spot market of the profit that you made the market in the future.
The opposite can also happen if you need 1 ton of barley to an end after three months and it is feared that the price may peak at the current level. Hedge against the risk of IT, you can have a corresponding long position in the futures market. If prices rise after the contract period, profit in the futures market are compensated for your loss occurredfor the purchase of goods from the spot market at higher price.
The big advantage is that the futures market operations do not pay full price for a tonne of barley, which can make the futures market is usually around 4% of the total value of the contract. This amount is called "initial margin". Every day your account will reflect the "marked-to-market for the price changes daily. That is, if the value of your order goes on, the amount equivalentadded to your account. If it fails, is subtracted from your account. If the margin is below the "level of maintenance", you need to invest more money. This is known as a "margin call".
Another aspect of the futures market should be considered. If a position requires a long or short in futures, it must accept an equal and opposite position before the contract expires unless he wants as long as the underlying asset. That is, if you buya day in barley contract in July, he must sell to a contract of barley July day. This process is known as "compensation". This usually happens when the first contract nears its maturity when the futures price reflects the price change in the underlying commodity.
Even if you like the cover above hypothetical example, it is necessary to "compensate" for your position before the signing of the contract due. At the end of the term, a final adjustment mark-to-market and settlement of the difference isgiven to dealers for cash.
Worldwide it is estimated that only 3% instead of futures contracts involves the physical delivery. The rest of the contracts "offset", as mentioned above. In some contracts, such as futures, delivery is not physically possible because the underlying is a stock index. In this case, the only option cash settlement.
Speculation
The role of speculators is very important inOperation of a futures market. If they do not hedgers can hedge their positions because there is nobody to take the risk. Speculators have no intention or make delivery of goods, and usually have no relation to the production of raw materials. They act on the market will benefit from changes in commodity prices. Speculators are betting not so blind. They analyze the market for raw materials and find ways to profit from the opportunitiesChanges in price.
Market Vs Futures Exchange
The most important difference between futures and stock markets is that stocks represent partial ownership in a business concern, while the future is only the futures contracts to receive or deliver goods within the required stocks are bought and held for many years compared to futures contracts in which the retention period ranging from minutes to months.
Another differenceis that the futures market, leverage can be very strong in the value of a contract to purchase contracts to about 5% of the sum of the initial margin. In the stock market, if you have a margin account, the maximum leverage is not going over 50% of the total value of the portfolio.
In the futures market, you can go just as easy as before. This means that you can benefit from lower profits, as rising prices. But the stock market, short-circuit has someThe restrictions, including those set by regulatory authorities.
In addition, futures prices fall to zero, never, because the price of the underlying commodity will never go to zero. But the shares are essentially worthless if the company fails below.
Trading Strategies
How to buy cheap and sell high "stock in trade" is the strategy most commonly used in the futures market. As you can easily sell very short in futuresMarket, buy low and sell high "approach can also be used. But to successfully use these strategies, you can expect the price movement of futures. Normally operators use two methods, namely, to predict futures prices, analysis fundamental and technical analysis.
Fundamental analysis is the study of supply and demand of the underlying commodity, it seems that the price of futures. For example, to predict, gold futures prices to afundamental analyst studies the supply and demand information and the forces acting gold.
Technical analysis is not much value to basic information. Instead, the study of the behavior of prices and try to model to help can find price estimates. They use different types of charts to analyze the behavior of prices.
Since both fundamental analysis and technical analysis have their limitations, some operators use a combination of both.
InIn addition, long and short strategies often, operators can use sophisticated strategies such as arbitrage and spread trading.
Arbitrage is the simultaneous purchase of goods from the same advantages in markets other than the price difference. For example, if gold is traded in London at the market price of a gram equivalent gram Rs.15000/10 Rs.15225/10 Mumbai market, a supplier with access to both markets, a market to buy gold from London and sell them toMumbai market, while benefiting from the grant Rs.225/10 grams. Normally, this kind of price differences rarely exist in real markets, and if they do, is to use the risk-free.
spread trading refers to buying and selling of two related but different forward contracts to profit from price / quality ratio. For example, it turns out that gold and silver futures prices rise or fall together, we also find, however, that the rising price of silverslower than gold and silver, the price will drop faster than gold. In this situation, you can create a long position in gold and a short position in silver. If prices rise, gold will be helpful to your larger than the loss of silver and if prices fall, profits will be greater than the loss of silver to gold.
Other uses of the term
The index futures can be used to hedge fund managers toagainst their risk portfolio, the portfolio or nearly resembles the target index. Today, the futures product portfolio is considered as an important asset class to diversify. It showed total risk, although studies show that the inclusion of a sufficiently broad range of futures product portfolio consists of a conventional investments such as stocks and bonds can be reduced.
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