Business
Futures Contract
A futures contract is a legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price on a specified future date. It allows businesses to hedge against price fluctuations and manage risk. Futures contracts are commonly used in industries such as agriculture, energy, and finance to lock in prices and protect against market volatility.
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11 Key excerpts on "Futures Contract"
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Research World(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter-3 Futures Contract In finance, a Futures Contract is a standardized contract between two parties to buy or sell a specified asset (e.g. oranges, oil, gold) of standardized quantity and quality at a specified future date at a price agreed today (the futures price or the strike price). The contracts are traded on a futures exchange. Futures Contracts are not direct securities like stocks, bonds, rights or warrants. They are still securities, however, though they are a type of derivative contract. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. The price is determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract. In many cases, the underlying asset to a Futures Contract may not be traditional commodities at all – that is, for financial futures , the underlying asset or item can be currencies, securities or financial instruments and intangible assets or referenced items such as stock indexes and interest rates. The future date is called the delivery date or final settlement date . The official price of the Futures Contract at the end of a day's trading session on the exchange is called the settlement price for that day of business on the exchange. A closely related contract is a forward contract; they differ in certain respects. Futures Contracts are very similar to forward contracts, except they are exchange-traded and defined on standardized assets. Unlike forwards, futures typically have interim partial settlements or true-ups in margin requirements. For typical forwards, the net gain or loss accrued over the life of the contract is realized on the delivery date.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- White Word Publications(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter-12 Futures Contract In finance, a Futures Contract is a standardized contract between two parties to buy or sell a specified asset (e.g. oranges, oil, gold) of standardized quantity and quality at a specified future date at a price agreed today (the futures price or the strike price). The contracts are traded on a futures exchange. Futures Contracts are not direct securities like stocks, bonds, rights or warrants. They are still securities, however, though they are a type of derivative contract. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. The price is determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract. In many cases, the underlying asset to a Futures Contract may not be traditional commodities at all – that is, for financial futures , the underlying asset or item can be currencies, securities or financial instruments and intangible assets or referenced items such as stock indexes and interest rates. The future date is called the delivery date or final settlement date . The official price of the Futures Contract at the end of a day's trading session on the exchange is called the settlement price for that day of business on the exchange. A closely related contract is a forward contract; they differ in certain respects. Futures Contracts are very similar to forward contracts, except they are exchange-traded and defined on standardized assets. Unlike forwards, futures typically have interim partial settlements or true-ups in margin requirements. For typical forwards, the net gain or loss accrued over the life of the contract is realized on the delivery date.
eBook - PDF- T. V. Somanathan, V. Anantha Nageswaran, Harsh Gupta(Authors)
- 2017(Publication Date)
- Cambridge University Press(Publisher)
A Futures Contract is a contract to buy or sell, a standard quantity of a standardised or pre-determined grade(s) of a certain commodity at a pre- determined location(s), on a pre-determined future date at a pre-agreed price. If this definition is studied carefully, the differences between a Futures Contract and a forward contract become apparent: DERIVATIVES 38 a. There is no reference to an agreement ‘between two parties’ – this is because Futures Contracts are almost always entered into through an intermediary (the exchange or its clearing house) that acts as the buyer to each seller and seller to each buyer. This is illustrated below: Figure 3.1: Forward Money | Buyer | | Seller | Commodity Figure 3.2: Futures Money Money | Buyer | | Exchange | | Seller | Commodity Commodity The absence of a one-to-one relationship between the buyer and seller also means that these contracts are freely transferable. b. There is a standard quantity for contracts, which is fixed by the exchange. (For example, in the international gold futures markets, transactions are in lots of 100 oz. each.) c. There is a pre-determined or standardised grade or, grades of the commodity, specified by the exchange, which can be delivered/taken delivery of. Where several varieties are deliverable, one variety is specified as the ‘deliverable grade’ or ‘basis variety’ or standard variety; 1 if any other variety is delivered, a premium or discount is charged/offered. d. The giving or taking of delivery is at a location specified by the exchange. Example 3.2 In the same case as example 3.1, if the transaction takes place through a commodities exchange, the mill will buy 2 tonnes of month of February rice at the prevailing futures price of 38,000. The farmer will simultaneously sell 2 tonnes of February rice at a price 1 The term ‘basis variety’ has been in common use in Indian commodity markets to describe the standard variety of a commodity Futures Contract.
eBook - PDFEnergy Price Risk
Trading and Price Risk Management
- T. James(Author)
- 2002(Publication Date)
- Palgrave Macmillan(Publisher)
KEY FACTS ABOUT Futures ContractS A Futures Contract is a standardised agreement between two parties that: ■ Commits one party to sell and the other party to buy a stipulated quan- tity and grade of oil, gas, power, coal, or other specified item at a set price on or before a given date in the future. 33 ■ Requires the daily settlement of all gains and losses as long as the contract remains open. ■ For Futures Contracts remaining open until trading terminates, the expiry of the contract provides either for delivery of the underlying physical energy product or a final cash payment (cash settlement). Futures Contracts have several key features: ■ The buyer of a Futures Contract, the ‘long’, agrees to receive delivery. ■ The seller of a Futures Contract, the ‘short’, agrees to make delivery. ■ The contracts are traded on regulated exchanges either by open outcry in specified trading areas (called pits or rings) or electronically via a computerised network. ■ Futures Contracts are marked-to-market each day at their end-of-day settlement prices, and the resulting daily gains and losses are passed through to the gaining or losing futures accounts held by brokers for their customers. ■ Futures Contracts can be terminated by an offsetting transaction (i.e. an equal and opposite transaction to the one that opened the position) executed at any time prior to the contract’s expiration. The vast majority of Futures Contracts are terminated by offset or a final cash payment rather than by delivery. For example, on the IPE and NYMEX less than 2% of the open interest (total contracts open) in their energy Futures Contracts go to physical delivery each month. A standardised energy Futures Contract always has the following specific items : ■ Underlying instrument: the energy commodity or price index upon which the contract is based. ■ Size: the amount of the underlying item covered by each contract. ■ Delivery cycle: the specified months for which contracts can be traded.
eBook - PDFArbitrage, Hedging, and Speculation
The Foreign Exchange Market
- Ephraim Clark, Dilip K. Ghosh(Authors)
- 2004(Publication Date)
- Praeger(Publisher)
Forward contracts are traded in the over-the-counter market and usually involve a financial institution on one side of the deal and either a client or another financial institution on the other side of the deal. One party to the deal 20 Arbitrage, Hedging, and Speculation takes a long position and agrees to purchase the asset. The other party takes the short position and agrees to sell the asset. The agreed price in the forward contract is called the delivery price, which is chosen so that the value of the contract to both sides is equal to zero. Consequently, it costs nothing to enter into a forward agreement. A Futures Contract is very similar to a forward contract. It is an agree- ment between two parties to buy or sell an asset at a certain time for a cer- tain price. Futures Contracts are traded on organized exchanges. To facilitate trading, the exchange specifies certain standardized features of the contract, and trading takes place in such a way that the exchange is the ultimate counterparty to each transaction. Futures Contracts differ from forward contracts in two other ways. First of all, payments are made over the life of the contract in what is called marking to market. Secondly, most Futures Contracts are closed out before maturity. Thus, the organized futures markets have four important features: (1) the contracts are standardized, (2) trading is organized and centralized either in one physical location such as the trading pit or in a virtual loca- tion such as a computerized order book, (3) contracts are settled through the exchange's clearinghouse, (4) contracts are marked to market each day, which means that they are revalued according to their market value. Standardized Contracts The Chicago Mercantile Exchange (CME) is one of the world's largest commercial exchanges. It began as a commodities market and for many years only commodities were traded on it.
eBook - PDF- Janette Rutterford, Marcus Davison(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
The remainder of the chapter begins with a general description of the major charac-teristics of financial Futures Contracts, their market mechanisms and pricing principles. We then describe in detail the specific features and pricing characteristics of the three main types of Futures Contract. Then we explore the advantages that futures enjoy over trading in the underlying cash products. We conclude the main section on financial futures by seeing how Futures Contracts can be used as surrogates for the underlying secu-rities for trading and investing purposes, as well as for hedging interest rate risk and equity risk. In a final section we describe swaps, which have become the major bilateral OTC product for the management of longer-term interest-rate and currency risks. FINANCIAL FUTURES MARKETS A Futures Contract is a legally binding agreement, concerned with the buying, or sell-ing, of a standardised product, at a fixed price, for cash settlement (or physical deliv-ery) on a given future date. (Euronext.liffe) As we saw in the introduction to this section, the simplest instrument for managing finan-cial risk is the forward contract in which two parties agree to execute a transaction at some future date, on terms which are fully specified at the outset. We used as a fictitious exam-ple a forward sale and purchase of shares, but in fact the most common forward contract traded today is the forward foreign exchange contract : that is, a contract for the exchange of one currency for another at a fixed rate on a fixed future date. We describe the characteristics of this contract and the reasons for its continued success in greater detail in Chapter 11 (on international investment).
- Tan Chwee Huat, Kwan Kuen-Chor, Tan Chwee Huat, Kwan Kuen-Chor(Authors)
- 2014(Publication Date)
- Butterworth-Heinemann(Publisher)
Chapter 17 The Futures Market Robert Chia 17.01 Background of Global Futures Exchanges The idea of a financial futures market was first introduced to the American financial community in the early 1970s. It was a product of the collapse of the Bretton Woods Agreement and of President Nixon's decision to sever the link between the US dollar and gold in August 1971. Thus, uncertainty in the international financial scene, together with rising inflation, created the need for a means to hedge against fluctuating exchange and interest rates. When it was first introduced in 1972 in the Chicago Mercantile Exchange (CME), the trading of currency Futures Contracts was a success. The New York Mercantile Exchange wanted a share in this new trade, and two years later it also began to trade in financial futures. In September 1982, the London International Financial Futures Exchange (LIFFE) also started operating. Soon after, other financial centres such as Singapore, Hong Kong and Toronto also set up their own financial futures exchanges. 17.02 Nature of Futures Contract A financial Futures Contract is a legally binding contract, effected in a cen-tral marketplace, to take or dispose of financial instruments/physical commodities at an agreed price on a specified date or dates in the future. It is not just a contract for the sale or purchase of actual commodities, currencies or stock indices. It is an agreement to buy or sell a certain amount of these goods at a fixed price on a certain date in the future. Be-cause they are contracts for delivery of goods in the future, traders can re-lieve themselves of their obligations by entering into an offsetting (or opposite) contract and closing the position without actually delivering the commodity. In fact, only about 2% of Futures Contracts result in 282
eBook - PDFFundamentals of Financial Instruments
An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives
- Sunil K. Parameswaran(Author)
- 2022(Publication Date)
- Wiley(Publisher)
Such a contract is termed as a forward contract, for it entails the negotiation of terms and conditions in advance for a trade that is scheduled to take place on a future date. In a forward contract, at the time of negotiating the deal the two parties have to agree on the terms at which they will transact on the future date. The following need to be clearly spelled out: (1) the underlying asset, in this case shares of ABC; and (2) the contract size, in this case 100 shares. The delivery date and the transaction venue should also be agreed upon. In our illustration the delivery date is 15 August, and we will assume that the venue for the exchange is New York City. Finally, the price at which the deal will be consummated on 15 August should also be fixed at the time of negotiating on 15 May. Let us assume that the price that is agreed upon is $80 per share. A forward contract is termed as a commitment contract, for it represents an unconditional commitment to buy the underlying asset on the part of the buyer and an equivalent commitment to sell on the part of the seller. If the buyer were to renege by not paying the contractual amount on 15 August, it would be tantamount to default. Similarly, if the seller were to refuse to part with the shares on that day, it would be construed as default. 235 236 FORWARD AND Futures ContractS In every forward contract there will be a party who agrees to buy the underlying asset and a party who agrees to sell the underlying asset. The first party is termed as the buyer or the long , while the counterparty is designated as the seller or the short . A forward contract is a customized or a private or an OTC contract. The term OTC , which stands for Over-the-Counter, connotes that such trades are not executed on an organized exchange. That is, a forward contract such as the one that we have described will not take place on an exchange like the NYSE.
eBook - PDF- Roy E. Bailey(Author)
- 2005(Publication Date)
- Cambridge University Press(Publisher)
The reason for drawing the distinction should become clear from the nature of Futures Contracts. 3 Keynes developed his theory of forward and spot prices in a Manchester Guardian (newspaper) article in 1923. Futures markets I: fundamentals 339 14.1.2 Futures Contracts Futures Contracts form a subset of forward contracts. They are legally binding forward contracts designed to facilitate trading in the contracts themselves at any time prior to the maturity date of the contract, T , specified for the delivery of the asset. (‘Maturity date’ and ‘Delivery date’ are used interchangeably in this context.) Futures, like forward agreements, commit the parties to the contracts to take specified actions at date T – that is, for the person who has promised to sell to deliver the asset, and for the person who has promised to buy to take delivery and to pay for it. Futures Contracts, however, possess characteristics that enable the parties to ‘undo’ their commitments at low cost and without breaching any contractual obligations. Where no ambiguity will result, in the remainder of this chapter the asset underlying any forward or Futures Contract is called simply ‘the asset’ or ‘the commodity’, as appropriate. Forward and Futures Contracts as financial instru-ments typically have value and are assets in their own right. Even so, the distinction between the derivative contract (forward or futures) and the asset on which it is defined should always be kept in mind. Let ft T denote the price of a Futures Contract at date t for delivery at T . 4 Just as for a forward contract, the price is the amount per unit of the asset to be paid at date T when the asset is exchanged – if the contract remains in existence at T . A trader who adopts a long position at t on a contract specifying delivery at T promises to pay ft T at date T in return for receiving the asset at T .
eBook - ePubFutures Markets (Routledge Revivals)
Their Establishment and Performance
- Barry Goss(Author)
- 2013(Publication Date)
- Routledge(Publisher)
1. Brief Review of Feasibility Conditions
A futures market is an organized exchange dealing in standardized contracts for forward delivery or settlement. Futures markets are widely held to serve several functions ranging from the transfer of the risk of price fluctuations to those better able to bear them (hedging), as guides to future cash prices and market expectations (thus assisting inventory control and business planning) and as a forum for speculation. Economists have devoted most of their attention to modelling the process and performance of futures trading and relatively little to developing a theory of why futures markets develop in one commodity rather than another. In my view this neglect can be attributed to two principal factors — the economists’ general preoccupation with pricing behaviour, and the bad image acquired by institutional analysis among North American economists due largely to the legal economics of John R. Commons (1934) and his followers.4 It is now firmly recognized among many economists, however, that the study of institutions is not only amenable to economic analysis but crucial to the understanding of economic activity. This recognition has spawned a new field of study, law-and-economics,5 and much work has been undertaken on the economic aspects of contract.6In the textbook model of perfect competition, where the same physical commodities are sold and consumed on different dates, it is assumed that there exists a ‘universal regime of futures markets, … extended to all times and all commodities’ (Arrow, 1981, p. 4; Radner, 1970). The real world is a radical departure from this theoretical ideal — there are in fact very few commodities traded in organized futures markets.The question naturally arises as to what are the factors which determine the feasibility of futures trading. In the past economists have attempted to answer this question by listing a set of so-called ‘feasibility conditions’. That is, a set of conditions that are seen to be necessary for a commodity to be eligible for Futures Contracting. The list of conditions changes with the authority consulted, but a modest list representative of this approach is provided by Goss (1972). In addition to price volatility and a spot market commitment on the part of the potential hedger, Goss (1972, pp. 4–6) lists five preconditions:
eBook - PDF- Todd Lofton(Author)
- 2006(Publication Date)
- Wiley(Publisher)
The forward contract may be for any amount, of any currency, for delivery at any time. There is no explicit cash mar- gin required, although banks may ask for compensating balances or other col- lateral. Futures offer other benefits. Banks generally consider $1 million as the basic unit for forward contracting. This may be more money than a small com- pany needs. The value of most individual foreign currency Futures Contracts falls in the $80,000 to $100,000 range. Another major benefit of the Futures Contract is its flexibility. A futures position can be reduced or abandoned altogether with- out incurring additional transaction costs. Finally, futures may offer considerably lower transaction costs, particularly if your business is not located in one of the major financial centers. Hedging Foreign currency futures are the financial futures most like the traditional futures markets. Hedging is straightforward; the holder of a foreign currency bank bal- ance would use a short futures hedge to protect against a decline in its value. An international businessman who would suffer losses if the value of a foreign cur- rency were to rise relative to his own would use a long hedge in the foreign cur- rency future. An example will make this clearer. Let’s say that Barbara Bradford, Inc., an American firm, imports designer buttons from Switzerland. The Bradford com- pany buys in large quantities and resells the buttons to U.S. manufacturers of high-fashion clothes for women. The buttons are priced in Swiss francs when 104 THE FINANCIAL FUTURES they are ordered. Because many of the buttons are specially made, there is often a considerable lapse of time between order and payment. Bradford has noticed that on some delayed orders, a large part of her expected profit has been lost to changes in the exchange rate. She has just ordered 125,000 Swiss francs worth of buttons.
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