Futures contracts are derivative financial instruments that represent an agreement to buy or sell a standardized quantity of a specific asset at a predetermined price on a future date. These contracts are commonly used in financial markets for both hedging and speculation.
Contents
- Why Are Futures Contracts Used?
- What Parameters Define a Futures Contract?
- What Makes Futures Unique?
- How Do Futures Trades Work?
- Futures Exchanges
Why Are Futures Contracts Used?
The primary purpose of futures contracts is to determine the price of an underlying asset. For market participants, they serve two main practical functions:
- Protecting against financial risks through hedging (often used by producers or consumers of the underlying asset)
- Speculating for profit (used by experienced traders and investors)
What Parameters Define a Futures Contract?
A futures contract has two main parameters:
- Expiration date – the specific date when the trade must be settled
- Underlying asset – the item being traded, such as commodities, currencies, stocks, or bonds (when involving currency, it’s called a forward contract)
Additional parameters include:
- The exchange where the contract is traded
- Contract size and unit of measurement (e.g., 100 barrels)
- Quotation unit (e.g., dollars per barrel)
- Margin requirements – the deposit needed to cover potential losses
What Makes Futures Unique?
Futures are unique because they involve a standard quantity of the asset and a set expiration date. After the expiration date, the next contract becomes active, and trading continues with the new instrument.
Since the price is fixed at the time of the contract and does not change until the expiration date, futures are often used for hedging against price fluctuations in the underlying asset.
How Do Futures Trades Work?
Futures contracts are popular among traders who profit from price volatility. They offer advantages over regular stock trading, such as lower commissions, higher leverage, and structured settlement processes.
Futures Exchanges
In Russia, the futures market is represented by the Moscow Exchange. It offers futures on stocks, bonds, commodities, energy products, currency pairs, and indices.
The most liquid instruments include:
Futures on Stocks
Futures on Commodities
Futures on Currency Pairs
Futures contracts are highly liquid but also volatile and risky. New investors should prepare thoroughly before engaging in futures trading.
FAQ
What is a futures contract?
A futures contract is an agreement to buy or sell a specific asset at a predetermined price on a future date.
What are the main uses of futures?
Futures are used for hedging against price risk and for speculative trading to profit from market movements.
Are futures risky?
Yes, futures are considered high-risk due to their leverage and price volatility, making them unsuitable for inexperienced traders.
