What is a futures contract?

A large number of various financial instruments participate in trading on the exchange. One of them, and very popular, is the futures contract. What is it and what are its features - this is exactly what will be discussed in our article.

The essence and concept

"Future" means "future" or "future" in English. A futures contract (sometimes simply called futures) is an agreement to sell or purchase the goods specified in this contract on a specific day and at a pre-agreed price. In the role of such goods can act as stocks, currency or just some product. A futures contract as a kind appeared because both producers and buyers wanted to hedge against unfavorable growth or falling in value in the metals, energy or grain business. Later, as it developed, this type of transaction began to spread to other types of trading instruments. In particular, it began to be concluded on stock indices, interest rates, currencies, etc. Currently, the world's largest futures exchanges operate, where the lion's share of trades in this instrument occurs. The most famous of these sites are the Chicago Chamber of Commerce, NYMEX (New York), LIFFE (London), FORTS (RTS section).

What a futures contract differs from the forward one

Buy goods in the future at a previously agreed cost can be using another tool. This is a forward contract. It is also quite popular, and it is often used to hedge risks. Often novice investors confuse forward and futures contracts, and therefore indicate their main differences:

1. Futures only applies on an organized exchange.
2. Forwards are obligatory for execution and are usually concluded for the purpose of real delivery of the goods.
3. Futures have a high liquidity and can be liquidated through the conclusion of a reverse (opposite) transaction.

Longs and shorts

When it comes to buying a contract, it means concluding a long transaction or long. In this case, the buyer assumes the obligation to take from the stock exchange a certain primary asset and, upon the expiration of the contract, pay the exchange the amount indicated in it. Short is a reverse operation. When the futures contract is "sold", the supplier undertakes to sell (deliver) the exchange to a certain asset when the contract expires, for which the exchange will transfer the appropriate amount of money to it according to the price specified in this contract. In both cases, there is no need to worry about fulfilling obligations - the settlement and clearing house is following this. Thus, it is not necessary for the investor to check the financial position of the counterparty.

General conditions

In order to conclude a futures contract, you must necessarily deposit a certain deposit on the brokerage account of the company. This amount is called the initial margin, and the account to which it is paid is known as the margin account. Its minimum size is set by the clearing house, guided by the accumulated statistics and taking into account the maximum daily deviation of the asset value. A brokerage company may also require the investor to deposit a margin in a larger amount. In addition, the client must have a futures account, which must contain at least 65% of the initial deposit. If this condition is not met, the broker will notify the investor about the need to make additional funds to achieve the level of the initial (variation) margin. Also, if this requirement is missed, the broker has the right to liquidate such a futures contract with the help of the opposite operation at the expense of the client. Every day after the end of the trading session, the Clearing House recalculates all open positions: the amount of the winnings is credited to the account of lucky investors from the account of those who lost. Also, the positions of the parties are corrected or their total number is limited.