In this article, I will introduce you to the world of futures trading.26 / 04 / 22 Visitors: 424
Let's start with the definition of a futures contract.
How are futures used ? Are these products transparent ? What are the risks ?
There is so much to tell about the future. Therefore, I will talk about all aspects of the future in different articles.
Futures trading: Part one.
In the first part, we will start with an introduction to the future. In finance , what is the definition of the future ? What are the main characteristics ? The answers to these questions can be found in this article.
Topics discussed in this article :
Definition of a futures contract.
What is the future ?
Futures, also called futures contracts according to the definition, are products aimed at protecting against expected price fluctuations. The French derivatives market is MATIF, an abbreviation of the "International Futures Market of France" "
A forward contract is often seen as the younger brother of a future contract. However, each of them has its own characteristics.
The future is a contract concluded between two parties (buyer-seller). They agree to buy/sell the basic product at a predetermined time and at a predetermined price. It is important to emphasize that these are standardized contracts that are traded on stock markets. With these two characteristics, the future is an important product for investors, companies and producers of raw materials. A forward contract is similar to a futures contract, but exchange intermediaries do not participate in it, and the buyer and seller can agree on all points of the contract.
The base cost and quantity of the future are fixed. In other words, this contract is standardized. These can be agricultural products such as corn or sugar, as well as financial instruments such as the US dollar. Since this contract is standardized, the only variable in the future is the price. This price is determined by the interaction of supply and demand in the stock market.
Basically, from a technical point of view, we can say that the stock exchange acts as an intermediary. Every buyer of the future buys this future on the stock exchange. Every seller of the future sells this future on the stock exchange. Thus, the risk for the counterparty is reduced. This is guaranteed by the scholarship. for example, an investor trades future CL (oil) on the NYMEX market. In this case, the mutual risk for the investor is guaranteed by NYMEX.
The four elements of the future.
What makes a contract a full-fledged futures contract? According to the definition of a futures contract, in order to be able to talk about the future, four elements are necessary.
The base value is the amount of the base value from the delivery date to the place of delivery.
Attention: physical delivery of the base cost is not possible. Consequently, the position will be closed before the final maturity date to avoid physical delivery.
Symbols of the future.
The code symbol of the future accurately indicates the base cost and duration of the contract. The first characters of the code indicate the base value. This code can contain from one to three characters.
The following letter corresponds to the month of expiration of the future contract. According to the definition of a futures contract, it is always one letter. A specific letter corresponds to a specific month. Check out these emails below. The symbol of the future ends with a digit. It specifies the expiration year of the contract.
January = F February = G March = H April = J May = K June = M July = N August = Q September = U October = V November = X December = Z.
- CLH9: CL = light sweet crude oil = base cost H = March = next maturity month 9 = 2019 = next maturity year.
- ESJ9 : ES = S&P 500 = base value J = April = - month term future 9 = 2019 = year of execution in the future.
- OJZ9: OJ = orange juice = base value Z = December = next repayment month 9 = 2019 = next repayment year.
The maturity of the future.
Every future that is traded has a maturity date. This is part of the definition of a futures contract. At the maturity date, two possibilities arise: the first option is physical delivery. The agreed amount of base cost is physically delivered. Only a small part of the traded futures belong to this type, in most cases there is no physical delivery. Physical delivery is not possible in LYNX. The second option is cash payment. That is: cash payment. Then the value of the futures at the time of opening the position is compared with the value found at the time of repayment. You will be able to see this difference on your securities account.
Futures that allow physical delivery are also traded in LYNX. Please note that depending on the long (long) or short (short) position, it will be closed before the maturity date. And this is to avoid physical delivery.
Futures trading: our series of articles.
Part One: Definition of a futures contract Part Two: notional value and tick size Part Three: Margin Call Part Four: Value report.