Overlook of the Futures Markets
Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. In this case, the buyer must purchase, or the seller must sell the underlying asset at the set price, regardless of the current market price at the. Expiration date. Futures markets are very active and often very liquid.
Underlying asset include can include physical commodities, indexes or other financial instruments, such as :
• Commodity futures such as in crude oil, natural gas, corn, and wheat
• Stock index futures such as the S&P 500 Index
• Currency futures including those for the euro and the British pound
• Precious metal futures for gold and silver
• U.S. Treasury futures for bonds and other products
Futures markets have started in 1970, at the creation of the International Money Market by the Chicago Mercantile Exchange. In 1974 appears the first futures contract on gold followed by a contract on the U.S. treasury bond in 1976. The main traded contract is the 3-month Eurodollar.
Futures contracts are traded on an organized market. the latter is characterized by 5 points :
• Standardization of the contracts
• Performance guarantee (thanks to the clearing house)
• Liquidity
• Transparency
• Opening
For your information, a clearing house is an intermediary between buyers and sellers of financial instruments. It is an agency or separate corporation of a futures exchange responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data. It is important to note the distinction between options and futures. Option contracts give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to respect the terms of the contract. The exchange on which future transactions will be made will determine whether the contract is for physical delivery or whether it can be cash settled. A company may enter into a physical delivery contract to lock in the price of a commodity it needs for its production. However, most futures contracts come from traders who speculate on the transaction. These contracts are liquidated or cleared, the difference between the initial
price and the closing price of the transaction, and are cash settled. Futures markets are regulated by the Commodity Futures Trading Commission (CFTC). The CFTC is a federal agency created by Congress in 1974 to ensure price integrity in the futures markets, including preventing abusive trading practices and fraud, and regulating brokerage firms engaged in futures trading.
Written on 18/11/2020
