What are futures?
The meaning of the term "futures" can be understood on the basis of the translation from English of the word future - the future.
Futures — this is a contract that requires you to buy or sell an asset at a fixed price in the future at a specified time. Futures contract execution is guaranteed by the exchange.
- Each futures contract has the following characteristics:
- Asset (for example, foreign currency, stocks, oil).
- The amount of the asset.
- Execution date (expiration date) of a futures contract.
- The strike price (strike price) is a fixed amount that the buyer pays and the seller of the asset receives.
When the due date comes, the buyer must buy and the seller must sell the asset at the exercise price. But often after the expiration of the term, there is no real deal, in which case the difference between the contract price and the real market price for the day specified in the contract is made.
Example: For example, in the spring a farmer puts futures for the sale of wheat at $ 100 a barrel. In the autumn, the price of wheat at the time of the purchase of goods is $ 110 per barrel. Here is a 10% net profit. And maybe in a month it will be $ 130 per barrel. In this case, the farmer is a hedger (hedging is risk insurance), and his buyer is a speculator (a speculator is a negative word here, although the stock speculator is a person who earns risky operations.)
Varieties of Futures:
Often in the economic news section are the words: Dow Jones (Dow Jones), Hadak (Nasdaq), RTS (Russian stock index). The value of these indices is calculated from the set of indicators of the economy to which the index belongs. The first of these are American. Dow Jones is an industrial index characterizing the market position of the 30 largest US companies. Nasdak operates shares of high-tech corporations..
The purpose of entering into a contract may be speculation on a change in the index or hedging securities included in the calculation of this indicator.
Futures on the RTS index, which is characterized by: high liquidity; minimum costs; maximum leverage. At the conclusion of the index futures all the relations between the buyer and the seller occur through the exchange, without the need for direct contact. Both profit accrual and write-off of losses. Upon expiration of the contract, each participant in the transaction will be credited (or debited) the amount of the difference between futures and real, the exchange receives its interest for intermediation.
As with conventional futures, a gold trade has the same principles, only the underlying asset is gold. Futures can be (similar to other types of contracts):
- поставочными: upon completion of the term, the seller undertakes to deliver gold to the buyer at the price specified in the contract (Russian MICEX-RTS does not carry out such transactions, only settlement transactions);
- calculated: at the end of the term, the parties calculate the difference between the futures and the real price.
The advantage of futures with gold is that the exchange provides a leverage of 1:20. That is, for making transactions, it is enough to provide security, which is 5% of the transaction amount. But the risk increases in proportion.
Actions that make it possible to make a profit or reduce risks:
- purchase in the expectation of higher prices for the metal;
- purchase in the hope of lowering the price of the metal;
- trading with the use of exchange "leverage";
- hedging losses from rising gold prices;
- hedging losses from lower gold prices.
Crude oil futures trading stock exchanges:
- NIMEX, New York: Light SweetCrude (light crude oil) is the most popular;
- ICE, London: Brent oil;
- Russian over-the-counter market: Urals brand oil.
Now only 2% of futures transactions are made by real suppliers and consumers of oil who hedge their risks. The remaining 98% of transactions are made by speculators. Trading on electronic stock exchanges does not take place. At the end of the auction, settlements are made between the futures parties. The benefit of working in this market is to provide leverage (1:20).