That is 'The future contract' | Information 2019 - What is it?
The future contract - the legal agreement to buy or sell special goods or an asset at the predetermined price in the demanded time in the future. Future contracts are standardized on quality and quantity to facilitate trade at the future exchange. The buyer of the future contract takes the obligation to buy a basic asset when the future contract expires. The seller of the future contract takes the obligation to provide a basic asset in time to the validity.
2019 - Future contract
Future contract, Information - 2019
Destruction of 'the future contract' | Information 2019 - What is it?
"The future contract" and "futures" belong to the same thing. For example, you could hear that someone told that they bought oil futures that means the same thing as the oil future contract. When someone tells "the future contract", they, as a rule, address to a certain type of the future, such as oil, gold, communications or futures of S/P 500 of an index. The term "futures" more general, is also often used to treat the whole market, such as , "They are a dealer in futures".
Example of future contracts
Future contracts are used by two categories of participants of the market: hedgers and speculators. Producers or buyers of a basic asset insure or guarantee the price at which the goods are sold or bought while investment managers and dealers can also conclude a bet in dynamics of the prices of a basic asset, using futures.
The supplier of oil has to sell their oil. They can use future contracts, do it. Thus, they can take in the price which they will sell in, and then will deliver oil to the buyer when the future contract expires. In the same way the manufacturing company, probably, needs oil to make widgets. As they like to plan in advance and always to have the oil arriving in every month they can also use future contracts. Thus, they foreknow the price which they will pay for oil (the price of the future contract), and they know that will take oil supply as soon as the contract expires.
Futures are available on many various types of assets. There are future contracts on share indexes, consumer goods and currencies.
Mechanics of the future contract
Assume that the supplier of oil plans to make one million barrels of oil for the next year. It will be ready to delivery in 12 months.
Assume that the current price makes $75 for barrel. The producer could make oil, and then sell it at the current market prices one year from now on.
Considering variability of prices of oil, market price at that time could differ very much, than the current price.
If the supplier of oil thinks that oil will be higher in one year, they can decide not to take in the price now. But, if they think that 75 - the good price, they could take - in the guaranteed selling price, having entered the future contract.
The mathematical model got used to price futures who agrees in attention to the current cash price, reliable rate of return, time by a maturity, costs of storage, dividends, dividend profitability and crops of convenience. Assume that one-year oil future contracts are estimated at $78 for barrel. Having signed this contract, in one year of the producer oblige to put one million barrels of oil and as guarantee, will receive 78 million. The price of 78 is received for barrel irrespective of, where the prices of the market of cash goods at that time.
Contracts are standardized. For example, one oil contract for Chicago Mercantile Exchange (CME) for 1.000 barrels of oil. Therefore if someone wanted to take in the price (sale or purchase) on 100.000 barrels of oil, they would have to buy/sell 100 contracts. To take in the price on one million barrels of oil(s) would have to buy/sell 1.000 contracts.
Trade of future contracts
Sell at retail dealers, and investment managers aren't interested in delivery or receiving a basic asset. The retail dealer has not enough requirement to receive 1.000 barrels of oil, but they can interested in a gain of profit on price steps of oil.
Future contracts can be sold simply for profit until trade is closed before the expiration. Many future contracts expire on the third Friday of month, but contracts really vary, so check technical requirements of the contract of any and all contracts before to exchange them.
For example, it is contracts in January and April, trade in 55. If the dealer believes that price of oil will grow before the contract expires in April, they could buy the contract in 55. It gives them control of 1.000 barrels of oil. They aren't obliged to pay 55.000 ($55 x 1.000 barrels) for this privilege, nevertheless. Rather broken only demands initial payment of edge, as a rule several thousand dollars for each contract.
The profit or loss of situation fluctuate in the account as the price of steps of the future contract. If loss becomes too big, the broker will ask that the dealer placed more money to indemnify loss. It is called edge of service.
The final profit or loss of trade are understood when trade is closed. In this case, if the buyer sells the contract in 60, they do 5.000 [($60-55) x 1000). Alternatively if reduction of prices to 50 and they close situation there, they lose 5.000.
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