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25/03/23, 10:45 What is Futures Contract? Definition, Examples, Types
Preço Certo : Este é o preço do contrato futuro que deve ser pago posteriormente
para que o instrumento financeiro seja predeterminado.
Tempo Futuro : Existem 3 ou mais meses civis por ano, durante os quais uma
possível entrega deve ocorrer para cada instrumento financeiro. Um contrato futuro
relacionado é negociado para cada um dos meses do calendário.
There is an expiry date for all Futures Contracts. As in India, All the future contracts
are expired on every month last Thursday. For example: Suppose you buy NIFTY
future contract with a lot size of 50 on 1st February 2016 of one month expiry at Rs.
7200. This means that future contract will get expire on 25th February 2016 (last
Thursday of the Month). Margin required to buy the future contract is around 11%;
which means to buy the future contract you will require Rs.39,600 (Rs.7200 * 50 (lot
size) * 11%). If NIFTY moves 50 points upside and reaches to 7250; which means
that you are making profit of Rs.2,500 (50 * 50 (lot size)). You can sell the future
contract even before expiry. If you sell with rise of 50 points in future market, then
you are making Rs.2,500 as a profit out of it.
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25/03/23, 10:45 What is Futures Contract? Definition, Examples, Types
There are various different types of Future Contracts for different class of assets
available in the future market. This includes: Stock Futures, Currency Futures,
Commodities Futures and Index Futures. You can trade in any of the contracts
wherever you are comfortable and wherever you possess a strong knowledge on it.
It is highly recommended that you should gain sound knowledge and perform paper
trading before you actually start investing and trading in the future market.
The futures contracts are born in Japan around 1600 and the aim of these contracts
was to ensure the price of a crop if a weather adversity comes. The first traded
products included the futures commodities, such as rice.
The mechanism was simple, the producer wanted to set a price before harvesting
the crop , as if there was an unfavorable climatic conditions, the farmer could lose
their harvest unable to sell anything. Thus they made sure to sell their crop at a
price. This today is known as a short sale because the farmer sells his crop to
grow before a contract price.
Once reached maturity, or harvesting of the raw material, they could be faced with
three situations:
1. The market price (the rest of farmers) is equal to the previously agreed
because there have been normal circumstances (no weather problems or
exceptionally good harvests).
2. The market price is higher than the agreed price; in this case the buyer is more
beneficial as it negotiated a price below the price at harvest. The farmer can get
hurt because the crop could be sold at a higher price, and this higher price, due to a
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25/03/23, 10:45 What is Futures Contract? Definition, Examples, Types
bad harvest could be due to adverse weather conditions, a plague … Being able to
get the farmer to have heavy losses.
3. The market price is below the agreed: In this case the buyer loses because it
paid a premium price for raw materials, whereas if they had waited could have
bought cheaper. The farmer gets away for surely there must have been a plentiful
harvest and given the offer, he was able to sell at a price above the market price for
the previous agreement made.
As you can see in this overview it is a question of assessing the value of time and
the risk (probability of a loss). Generally and currently, the derivatives are used to
hedge risks, using valuation methods.
Also as you can imagine the reader, if this market was not organized enough for a
strong impassive to breach the contract in cases 2 and 3, first by the farmer,
because there would be willing to sell the crop at a lower price market and in the
third case because the buyer would not be willing to buy more expensive than the
market price. This need for organization culminates in 1848 in Chicago, creating the
Chicago Board of Trade (CBOT), which was a pioneer in the stock trading in futures
contracts. At the time the contracts were settled by physical delivery, as expected.
The first futures contracts, as I said, were commodities (rice, corn, wheat, cotton …)
and in the 80s, it began trading other products such as wood or some metals. And
in the 90s they began to negotiate contracts on government bonds in the India, and
later the first stock indices. Currently, the futures contracts include the widest range
of traded products.
Conclusion:
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25/03/23, 10:45 What is Futures Contract? Definition, Examples, Types
In short, performing of the contract at a later date is in itself a business method that
is common and practiced by everyone. So the unique character of the futures
markets is not the time period but the fact that the contracts are standardized.
Average rating 5 / 5. Vote count: 10
JORGE SLENKER
MAY 18, 2018 AT 10:49 AM
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25/03/23, 10:45 What is Futures Contract? Definition, Examples, Types
Reply
JENNA DINAH
FEBRUARY 18, 2018 AT 6:38 PM
Well Explained I just want to add future trading example India for other readers
as well: If you want to buy a single August futures contract of ABC Ltd., you would
have to buy at the price of August futures contracts are currently available in the
derivatives (future) market. Let’s say that ABC Ltd August futures are trading at
INR 2,020 per share. This means, you are agreeing to either buy or sell at a fixed
price of INR 2,020 per share on the last Thursday in August. However, it is not
necessary that the price of the stock in the cash market on Thursday has to be INR
2,020. It could be INR 1990 or INR 2019 or INR 2,025 or anything else, depending
Reply
WIKIFINANCEPEDIA TEAM
MAY 2, 2018 AT 8:00 AM
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