Futures

FUTURES
Consider yourself as a farmer growing corn. Say,
now it is April and your crop is likely to harvest in
the month of July. There is an uncertainty about
the price you will receive for the corn. In the years
of low supply or scarcity, you might get a high price
– specially if you are not in a hurry. If there is over
supply of corn, you may get low prices. In the latter
case you are exposed to risk.
On the other hand, consider a merchant who
requires corn. His position is exactly in contrast. His
exposure to risk would be when there is scarcity of
corn.
FUTURES
In such a situation, you would be really happy and
safe, if you could know exactly, what price you
would receive on selling the corn.

Here, the FUTURES MARKET will enable you to
enter into a contract and lock the price. Futures
contracts are legally binding agreements to buy or
sell a commodity sometime in the future at a
specified price and at a specified date.
This enables both the buyer and the seller to
minimize their exposures.
FUTURES
Say, you are a trader in Chicago. In March, you have
instructed your broker to buy 10000 bushels of corn to
be delivered in July. Your broker immediately passes
this instruction to another trader at the Chicago
Board of Trade (CBOT) an exchange.
At the same time another trader advises his broker to
sell 10000 bushels of corn for delivery in July.(The time
and quantity may not always match). This information
is also passed on to a trader sitting in the exchange.
Now, the traders would meet at the CBOT would meet,
agree on a price and other important issues and the
deal would be struck.
FUTURES
In this example your position is said to be a “Long
Futures Position” as you have agreed to buy. The
person who has agreed to sell is said to be in a
“Short Futures Position”. The act of buying is called
“Going long” and the act of selling is called “Going
Short”. The price agreed upon in called the
“Futures price”. These transactions can be executed
through certain exchanges only. The largest futures
exchange of the world are the CME(Chicago
Mercantile Exchange) and the CBOT.
FUTURES


Therefore, a futures contract can be defined as an
agreement, to buy and sell a standard quantity of
a specific instrument, at a predetermined future
date, and at a price agreed between the parties,
through open outcry, on the floor of an organized
futures exchange.




Difference between Futures & Forwards
PARTICULARS FUTURE
MARKETS
FORWARD
MARKETS
LOCATION FUTURES
EXCHANGE
NO FIXED LOCATION
SIZE OF CONTRACT STANDARD
(FIXED)
DEPENDS ON THE
CONTRACT
MATURITY STANDARD
(FIXED)
DEPENDS ON THE
CONTRACT
Difference between Futures & Forwards
PARTICULARS FUTURE
MARKETS
FORWARD
MARKETS
COUNTER PARTY CLEARING
HOUSE
BANK OR CLIENT
MARKET PLACE EXCHANGE OVER TELEPHONE
GENERALLY
REGULATIONS EXCHANGE
REGULATIONS
SELF REGULATED
Difference between Futures & Forwards
PARTICULARS FUTURE
MARKETS
FORWARD
MARKETS
CREDIT RISK ALMOST NON
EXISTENT
DEPENDS ON
COUNTER PARTY
SETTLEMENT THRU CLEARING
HOUSE
SELF SETTLEMENT
LIQUIDATION MOSTLY BY
OFFSETTING
TRANSACTIONS,
VERY FEW BY
DELIVERY.
SELF REGULATED