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FUTURES THE CONCEPT

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Sunanda K. Chavan
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FUTURES THE CONCEPT - October 8th, 2010

FUTURES – THE CONCEPT

A futures contract can be defined as a standardized agreement between the buyer and the seller in terms of which the seller is obligated to deliver a specified asset to the buyer on a specified date and the buyer is obligated to pay to the seller the then prevailing futures price in exchange of the delivery of the asset.

The futures contracts represent an improvement in the forward contract in terms of standardization, performance guarantee and liquidity. Whereas forward contracts are not standardized, the futures contract are standardized ones, so that

1. The quantity of the commodity or the other asset which could be transferred or would form the basis of gain/loss on maturity of the contract,

2. The quality of the commodity – if a certain commodity is involved – and the place where delivery of the commodity would be made,

3. The date and month of delivery,

4. The units of price quotation,

5. The minimum amount by which the price would change and the price limits of the day’s operations, and other relevant details are all specified in a futures contract.

Thus, in a way, it becomes a standard asset, like any other asset to be traded.

Futures contracts are traded on commodity exchanges or on other futures exchanges. People can buy of sell futures like other commodities. When an investor buys a futures contract (so that he takes a long position) on an organized futures exchange, he is, in fact, assuming the right and obligation of taking delivery of the specified underlying item (say 10 quintals of wheat of a specified grade) on a specified date. Similarly, when an investor sells a contract, to take a short position, one assumes the right and obligation to make delivery of the underlying asset.

While there is a risk of non-performance of a forward contract, it is not so in case of a futures contract. This is because of the existence of a clearing house or clearing corporation associated with the futures exchange, which plays a pivotal role in the trading of futures. Unlike a forward contract, it is not necessary to hold on to a futures contract until maturity – one can easily close out a position in the futures contract.
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Rose Marry
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Re: FUTURES THE CONCEPT - April 19th, 2016

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Originally Posted by sunandaC View Post
FUTURES THE CONCEPT

A futures contract can be defined as a standardized agreement between the buyer and the seller in terms of which the seller is obligated to deliver a specified asset to the buyer on a specified date and the buyer is obligated to pay to the seller the then prevailing futures price in exchange of the delivery of the asset.

The futures contracts represent an improvement in the forward contract in terms of standardization, performance guarantee and liquidity. Whereas forward contracts are not standardized, the futures contract are standardized ones, so that

1. The quantity of the commodity or the other asset which could be transferred or would form the basis of gain/loss on maturity of the contract,

2. The quality of the commodity if a certain commodity is involved and the place where delivery of the commodity would be made,

3. The date and month of delivery,

4. The units of price quotation,

5. The minimum amount by which the price would change and the price limits of the days operations, and other relevant details are all specified in a futures contract.

Thus, in a way, it becomes a standard asset, like any other asset to be traded.

Futures contracts are traded on commodity exchanges or on other futures exchanges. People can buy of sell futures like other commodities. When an investor buys a futures contract (so that he takes a long position) on an organized futures exchange, he is, in fact, assuming the right and obligation of taking delivery of the specified underlying item (say 10 quintals of wheat of a specified grade) on a specified date. Similarly, when an investor sells a contract, to take a short position, one assumes the right and obligation to make delivery of the underlying asset.

While there is a risk of non-performance of a forward contract, it is not so in case of a futures contract. This is because of the existence of a clearing house or clearing corporation associated with the futures exchange, which plays a pivotal role in the trading of futures. Unlike a forward contract, it is not necessary to hold on to a futures contract until maturity one can easily close out a position in the futures contract.
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