Futures (futures contracts)

Futures (futures contracts) - is a derivative security (derivative), which is an agreement to set conditions for the purchase or sale of a standard quantity of a certain asset at a certain time in the future, at a price set at the time of the transaction.

There is a rule that at least two business days must elapse between the determination of the terms of the transaction and its execution, otherwise the transaction is considered immediate.

Why do we need futures contracts?

Futures have three general purposes:

• the most important purpose of futures in general is to determine the price of an instrument.

The application value to market players can be one of two (or a combination):

• insurance against financial risks, i.e. hedging (are engaged mostly by actual suppliers or consumers of the tool)
• speculation for financial gain (engaged by experienced traders and investors)

What parameters does the futures have?

Any futures has two main parameters:

• Execution date - i.e., the specific date on which the sale transaction is to take place,
• instrument - i.e. the object of the contract, be it commodities, raw materials, securities, or currency (in the case of currency, such a contract is called a forward contract)

Additionally there are other parameters:

• the exchange on which this futures is sold;
• size and unit of measure (e.g., 100 barrels);
• unit of the quotation of the contract (e.g., dollars per barrel);
• The amount of margin (i.e., the amount that is deposited when the futures are signed and held to cover loss, if any).

What is the peculiarity of futures?

The peculiarity of the futures is that this transaction involves a standard quantity of goods (called a contract or lot) and a specific deadline (called the delivery day). After the expiration of the delivery date specified in the futures contract, the next one is set, and bidding begins on the new contract.

Because the price of a futures is set at the time of the transaction and does not change until the day the contract is executed (regardless of what the price of the underlying asset is), futures are often used by sellers to insure their own risks when trading various instruments and commodities, which is called hedging.

Futures trading

Futures contracts are especially popular among traders who profit from fluctuations of stock prices, because they have a number of advantages over conventional stock trading (namely, low commissions, increased leverage, procedures for calculating exchange rate differences, etc.). The most liquid contract on the Russian futures market is the futures on RTS Index.

Futures Exchange

In Russia, the futures market (Forts) is represented by the Moscow Exchange. Futures on shares, bonds, commodities, energy, currency pairs and indices are available on the futures exchange.

The most liquid instruments are:

Stock futures

Index futures

• MIX (Moscow Exchange)
• RTS (Russian Trading System)

Commodity futures

Futures on currency pairs

Futures are very liquid, unstable and quite risky, so novice investors and traders should not deal with them without proper preparation.

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