Investment opportunities using futures, Key futures characteristics - Investments

Investment opportunities using futures

The main characteristics of futures

A futures contract is an agreement between two parties to a transaction (buyer and seller of a futures), as a result of which certain obligations arise for the parties to the futures deal. According to the Regulations on types of derivative financial instruments, a futures contract (contract) recognizes an agreement concluded at the exchange auctions, stipulating the obligation of each party to the contract to periodically pay monetary amounts depending on the change in price (prices) and (or) value (s) of the underlying (basic) asset and (or) the occurrence of a circumstance that is a basic (basic) asset. Such a futures contract is considered a settlement contract.

A futures contract (contract) may also provide for:

• the obligation of a party to the futures contract (contract) to transfer to another party securities, currency or goods that is a basic (basic) asset, including by concluding (by parties) a futures contract (contract) and (or) a person ), in the interests of which a futures contract (contract) was concluded, a contract for the sale of securities, a contract for the purchase and sale of foreign currency or a contract for the supply of goods (such a contract is deemed to be a delivery contract);

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• the obligation of the parties to a futures contract (contract) to enter into a contract that is a derivative financial instrument and constitutes a basic (basic) asset (settlement contract).

Futures contracts have several basic features that distinguish them from forward contracts:

1) they are standardized in terms of the contract specification - the type, quantity and quality of the underlying facility, the delivery date of this facility;

2) futures transactions are made on specially designated exchanges, the associate member of which is the clearing house, clearing futures transactions and providing guarantees to both sides of the futures transaction;

3) when making futures deals, a margin is used.

Example 6.4. Consider the currency futures: the two sides signed a futures contract in April 2010 for the EUR/USD with a performance in September at a price of $ 1.3675 This means that, at the time of delivery, the futures seller is required to sell the futures contractor the contractual amount of euros (for example, 10,000 euros) but at a price of 1.3675 dollars, and the futures owner is obliged to buy this amount of euro at a contract price of 1.3675 dollars per euro.

These features make a futures contract in many respects similar to a security, transactions with which can be made continuously during the duration of the futures. In this regard, operations conducted with futures are in many respects similar to transactions with shares - both are carried out on stock exchanges, clients at the same time use almost similar kinds of orders, operations on the stock exchange are carried out only by its members, etc. But there are also principal differences:

• buying shares means buying them directly, whereas when buying futures, the owner does not become the owner of the underlying funds for which the futures contract is concluded, until the contract expires, when the funds are delivered by the futures seller to the buyer;

• futures contracts require more significant amounts of borrowed funds. When buying shares, the initial margin is much higher (more than 50% of the cost of the acquired shares), whereas when buying a futures contract, such margin does not exceed 20% of the transaction amount;

• stock prices can change without any restrictions. Transactions with futures necessarily provide for limits, within which the price of contracts is allowed to change. If this level is exceeded, the deals are terminated;

• There are no restrictions on the short sale of futures, while for stocks it is prohibited to short sell in case of a tendency to decrease their price;

• Transactions with futures are much easier, since there are no dividend payments, consolidation and crushing of futures;

• In the case of stock transactions, & quot; and round lots & quot; not equal to 100 shares. Futures contracts are made only for standard lots;

• futures contracts are valid for several months, less than one or two years, while the time of action of the shares is practically unlimited;

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• As in the case of option trading, futures contracts require specific months for the end of the contract. The terms of the futures contracts and months of their endings are different for different types of fixed assets. For shares, the deadlines for their completion are not introduced.

Features of transactions with futures contracts allow you to formulate the basic principles of making futures transactions.

• The price of the underlying means must fluctuate in both directions (that is, be volatile). This requirement is of fundamental importance - after all, each futures deal involves the participation of two parties, one of which necessarily calculates the price of the underlying asset in the future, and the other - to reduce it. If the price of the underlying means changes little, or tends only to increase (decrease), it is difficult to find partners for a futures deal.

• Competitive conditions of the market of the basic means with a large number of buyers and sellers must be provided. Futures trading is not allowed for goods with a high level of monopolization of the industry, allowing the manufacturer to influence, to a large extent, the price of the goods. There should be no state control over the prices of this product. In this regard, for example, futures trades for gold and silver are held, but not diamonds, the trade of which is almost completely controlled by the companies "De Beers" and & quot; Alrosa & quot ;;

• A significant spot (spot) market for a basic commodity with widely available information is needed. In the end, if there is no broad cash market for some commodity, that is, there is no supply and there is no demand, then why conclude a futures contract on it?

• The basic means should consist of homogeneous (identical) constituents, where each part of the basic facility can be sold as the basic means itself. From this point of view, corporate bonds can not be the subject of futures deals - they are too risky, but futures deals with government securities are widely known.

Another important condition for the execution of futures deals is standardization. The futures market of each product presupposes its own transaction standards, which include fixing the following characteristics in the standard.

1. The amount of the basic instrument to be delivered by the seller of one futures (the volume of one lot).

2. Quality of the base product.

3. The expiration date of the futures, i.е. when the underlying instrument must be delivered to the buyer or when the settlement of the transaction is to be made.

4. The last day of the month of the end of the futures contract, when the seller is obliged to deliver the underlying product to the buyer.

5. Minimum allowable price deviation.

6. The limit of the price change of the goods within one day of bidding.

7. Required margin (collateral).

8. Hours of transactions with futures contracts.

9. The last day of futures trading in the month of the end of the futures contract.

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