|
Futures Contract
A futures contract is a forward type of contract that is traded on a
futures exchange to buy or sell an underlying instrument at some appointed
delivery date (or final settlement date) at a predetermined price. This
price is the futures price.
For
those interested see Futures
Basics for
an introduction.
Along with the futures price there is a settlement price -- the price
of the underlying asset on the settlement date as calculated by the
exchange. Settlement can be achieved either by physical delivery or
by cash settlement.
In practice, physical delivery is not predominant
since traders change positions prior to settlement or may also liquidate
by contract sale.
Both the buyer and the seller of the futures contract are obligated
to exercise the contract on the delivery date. Unlike the options
contract where only the seller (writer) of the contract carries the
obligation to buy or sell if the contract is assigned.
Futures traders
are one of two stripes; (a) hedgers who are usually growers, producers
and consumers of, who are seeking to hedge their
price-related-risk and (b) speculators engaging for a profit interest
due to price fluctuations with the commodity. Speculators are without the interest in the commodity
itself.
The futures contact is standardized and spells out facts like minimum price fluctuations,
the units and size of the contract, the underlying asset itself, the grade(s)
and deliveries of the physical commodity, by location and month, and the last
trading day.
Backwardation is a term that refers to when the commodity future delivery price
is lower than the spot price (see futures
premium) or for nearest delivery
month(s).
Contango, opposite of backwardation, refers to when the commodity future delivery
price is higher than the spot price or for nearest delivery month(s).
Contracts on futures trading take place on the commodity exchanges such as the
Chicago Board of Trade and the New York Mercantile Exchange and the London Metal
exchange and many others across the world. While trading contracts for energy
(refer to oil futures for further
details), metals futures (both industrial and precious metals) and livestock,
grain and softs are traded by their futures
trading symbols at major exchanges though some are traded at more than a single exchange.
The CFTC – Commodity Futures Trading
Commission and the NFTA – National
Futures Trading Association both actively participate in regulating trading transactions on the exchanges.
An option
contract is commonly traded on futures either as puts or calls.
|
|
