January 6 2018

What are Futures?

In recent decades, the absolute majority of business participants realized that they are more or less subject to financial risks.

 

Exporters and importers are exposed to the risk of exchange rate fluctuations; lenders and borrowers are exposed to the risk of changes in interest rates; owners of securities portfolios are exposed to the risk of fluctuations in stock prices and bond rates.

 

If you want to imagine a company that would get rid of all these problems, then its portrait will be something like this: a small company that works exclusively on local raw materials, sells finished products exclusively in the local market, has sufficient equity to avoid taking loans in the bank, and keeping free cash in the form of cash in its own safe.

 

Are there many such a companies?

 

The recognition by business participants of their vulnerability to financial risks entailed the development of strategies for managing these risks, which in turn led to a staggering growth in those segments of the financial market that offered protection from risks.

 

The most vivid example of such protection was the futures trade in financial assets.

 

What are futures?

 

Futures trading is one of the types of investment, which includes the possibility of speculation on fluctuations in the price of goods.

What is a product?

Most of the goods are familiar to us from our daily life.

 

It is:

  • – grain from which bread is baked
  • – wood from which produce furniture
  • – gold from which ornaments are melted
  • – cotton from which we weave clothes
  • – the steel from which the car is made and the crude oil that makes this car move
  • – the currency that is used to buy all these things …

 

All these products (as well as many others) are bought and sold daily by hundreds of thousands of traders around the world. All of them are trying to make a profit by buying goods cheaper and selling them more expensively.

 

Basically, futures trading is carried out exclusively with a speculative purpose.

 

In other words, it is very rare for a trader to buy a scrap of paper called futures, is actually going to get or provide the goods indicated in it.

 

What is a futures contract?

 

For the uninitiated, the term futures contract may resemble something solid and indestructible, which is mandatory for execution.

 

However, this is not quite true. The term futures itself means that the contract (contract) is for the delivery of a certain product, but not now, but in the future.

 

In the futures contract, the date when this contract is to be executed (expiration date) is indicated.

 

Until that date, you can freely get rid of the obligation assumed by selling (in the case of the initial purchase) or buying (in the case of initial sale) futures.

 

Many intraday traders own futures contracts only for several hours or even a few minutes.

 

The expiration date of futures can fluctuate very much from commodity to product and traders who are going to make a deal decide on the choice of a futures contract depending on their tactical and strategic goals.

 

For example, today is the 30th of July and you believe that the grain will grow in price until the middle of September.

 

For the grain there are specifications of contracts for: March, May, July, September, December.

 

Since the end of July is now and these contracts have already expired, then you probably choose to trade September or December futures.

 

The closest (by expiration date) futures contract is usually more liquid, in other words, the greater number of traders they trade.

 

This means that the price of this tool is more realistic and there is little likelihood that it will make jumps from one extreme to the other.

 

However, if you believe that the price of grain will grow until October, then you can choose a more distant contract (December in our case) – since the October contract does not exist.

 

There are no restrictions on the number of contracts that you can trade (provided that there are enough buyers and sellers to make a reverse transaction).

 

Many large traders / investors, companies / banks, etc. conduct operations with hundreds of contracts simultaneously.

 

All futures contracts are standardized by the exchange, the latter rigidly determines the quantity and quality of the goods indicated in them.

 

For example: 1 Pig Carcass futures contract (PB) stipulates the delivery of 40,000 pounds of Pork Carcasses of a certain size; the gold contract (GC) stipulates the supply of 100 troy ounces of gold not less than 995 samples; The crude oil contract stipulates the supply of 1000 barrels of crude oil of a certain quality, etc.

 

Specification of futures contracts

 

A Brief History of Futures Trading

 

Prior to the appearance of futures trading, both producers of goods (for example, farmers who grow grain) and their consumers (for example, bread and bakery plants who buy grain) had to deal with the risks of fluctuating the price of the commodity.

 

So, the farmer suffered losses in the event of a fall in the price of grain, and the bread-bakery lost when it became more expensive.

 

The shift in the organization of trade occurred when the commodity producers and their consumers began to conclude in advance contracts for the delivery of a certain product at a certain price for a certain time.

 

Futures trading started!

 

The city where the first futures contracts began to bargain became Chicago.

 

The convenient geographical and transport location of the city (in the southern part of the Great Lakes system) contributed to its rapid development primarily as a grain terminal.

 

It was there that farmers, in order to insure their production risks, began to massively resort to the preliminary conclusion of contracts with the subsequent delivery of agricultural products not yet grown.

 

For the convenience of making such transactions, 82 merchants in 1848 organized the first US stock exchange in the city.

 

It has received the name of the Chicago Chamber of Commerce.

 

Until 1851, exchange trade was conducted, in fact, a real commodity, but then in the turnover there were also fixed-term contracts (contracts stipulating the delivery of goods not now but for a certain period in the future).

 

However, they were not unified and consisted of individual conditions. For the emergence of futures, there was only one step left – to standardize traded contracts.

 

This step was taken in 1865 – the conditions for standard contracts, which were called futures contracts, were standardized on the stock exchange.

 

As a mandatory condition of the futures contract, the quality, quantity, period and place of delivery of the goods was indicated.

 

At first, the futures market consisted of only a few farm products, today a full list of traded futures contains hundreds of tools.

 

This includes metals: gold, silver, platinum; meat: pork carcasses, cattle, grains: oats, soybeans, wheat; oil: crude oil, natural gas; as well as more modern financial instruments, including a wide variety of interest rates, currencies, stock and other indices, such as Dow Jones, Nasdaq and S & P 500.

 

 

Who trades in futures?

 

When the futures market has reached a significant size, it has become very attractive for numerous companies and individuals investing free funds in various goods, or speculating at fluctuations in their prices.

 

Thanks to the futures market, the need to buy and sell REAL goods (wheat, oil, etc.) has disappeared.

 

Now it was possible to limit ourselves to making transactions by means of small pieces of paper that represented these goods.

 

Until then, until the time for the contract is up to date, the futures remain just a piece of paper.

 

These considerations gave impetus to the start of speculative and investment activities of many traders in the futures market. Today, about 97% of operations in the futures market are purely speculative.

 

There are two groups of traders working with futures: hedgers and speculators.

 

Hedgers are producers of certain goods (farmers, oil, coal companies, etc.) that enter the futures market for insurance of production risks.

 

For example, if a farmer is afraid that the price of wheat may fall at the time of sale, he can sell a futures contract for wheat.

 

If the price of wheat really falls, the farmer will cover his losses from the profits formed after the sale of the futures contract.

 

Here the same principle applies as for the sale of a real commodity: a farmer sells at a high price a contract for wheat (which was expensive at the time of the deal) and buys it later at a lower price – as a result of this operation, he makes a profit.

 

Other hedgers working in futures markets are banks, insurance companies, pension funds.

 

They use futures contracts to insure the risks of currency fluctuations.

 

Speculators are independent traders and private investors.

 

In most cases, they have nothing to do with the risks associated with fluctuations in the prices of goods, as well as the goods themselves.

 

They are simply trying to profit by concluding futures contracts for: a) buying goods that they expect should go up in price and b) selling goods that they expect will be cheaper.

 

Direct access to trade

 

E-Global Trade & Finance Group, Inc® provides access to all major production markets, allowing trading in futures and futures options, both via the electronic network and through the opening of “outcry”: EUREX, CME, LIFFE, EURONEXT, CBOT, IDEM , NYMEX, NYBOT, Kansas City Board of Trade, Winnipeg Exchange, and many other markets.

 

System Trading

 

E-Global Trade ® works with specialists from several third-party trading systems, whose products are available to the company’s customers. Own brokers of the company, selling “on-line”, perform system orders for the most different trading programs of the system on behalf of our clients.

 

Advantages of the company to other brokers

 

– E-Global Trade & Finance Group, Inc® allows you to trade contracts of futures and options with MINIMUM spreads, guaranteeing you safety and convenience. Direct access to markets guarantees you a reliable data channel and a hundred percent order placement.

 

– A trader is given the opportunity to choose among a number of BEST platforms. You can choose in favor of the platform that meets your requirements.

 

– To open a real account you need only 1 USD

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Posted 06.01.2018 by admin in category "Forex, CFD's, Shares Trading