Futures

Futures (Futures contract) - is a standard contract to buy or sell a standard amount of commodity on the certain date in the future, at a market-determined price. It-s generally accepted, that between the contract conditions fixation and the execution itself two days should past, otherwise these bargains are referred to Tod, Tom, and Spot.

In futures contract, as in any other contract, there are two parties - the buyer and the seller.

The futures contract buyer assumes the obligation to buy the commodity in the certain term.

The futures contract seller assumes the obligation to sell the commodity on the certain term.

Both obligations are referred to the standard amount of a specified commodity, on the certain term in the future at a market-determined price.

Standard amount. Futures are traded on a futures exchange in a form of standardized portions of commodities or assets, these portions are called contracts or lots. This is the main difference of futures from forwards. Forwards are traded on non-exchange market, so the amount of asset is not specified and depends on seller and buyer agreement.

Certain term. Futures deliveries are performed on a certain term (terms), called the delivery day (days). This is the day fixed for commodity and money exchange. Futures have a final time of living and when the last trade day is expired the conclusion on the execution day is impossible. New day is settled and new futures are traded.

Price. Futures price is settled during contract conclusion and is not changed till the contract is fulfilled regardless of the prices for underlying asset. That-s why the futures are the main hedging tools form currency risks. Futures market participants.

Many agents of the real sector of the economy resort to futures contracts. Some participants, for ex. farmers, equipment producers and buyers pursue an aim of risk minimizing, but the futures sellers, on the contrary, in search for the high yield, accept the risk. Futures markets, as a matter of fact, are risk wholesale markets, i.e., the markets where risk passes from risk-averse agents to those, who are ready to accept it for a certain payment.

So then futures- buying means passing the risk to the other agent. Futures sell means accepting the price risk. For that reason futures market participants can be divided into two main groups - hedgers and jobbers. Hedger wants to minimize the risk, and the jobber runs the risk, trying to get more profit.