What is a futures market?
Financial markets are spot (cash) and also urgent. Derivatives market is a trading platform in which the execution of transactions is carried out after the end of a certain period from the moment of signing the contract. As for urgent transactions, then all settlement operations on them are performed during a period that exceeds 2 days.
In the conditions of an urgent exchange, futures and options are traded. That is, contracts that allow you to purchase or implement in the future the main assets at a predetermined value. These include stocks, bonds, various currencies, etc.
It should be understood that there are both speculators and investors on the derivatives exchange. After all, with its help they can insure large portfolios and get profit from increasing market volatility. However, due to the low level of collateral for futures, you can increase profits, and the acquisition of certain options provides an opportunity to make a profit on raising or lowering the underlying asset. The risk is minimal.
Advantages of the futures market
Numerous investors give preference to the futures market, rather than the spot market. What caused their choice? There are several reasons for this:
- Many different assets. In addition to the conclusion of single transactions, investors can form their own strategy, the basis for which will be a combination of various types of derivatives.
- Impressive profitability. Unlike the spot market, an urgent one is distinguished by a high yield. Investors contribute as a so-called guarantee coverage only a certain proportion of funds.
- There are no transaction costs. In this case, we are talking about the commission that is charged for the use of credit funds, and about payment for the services provided by the depositary.
- High level of liquidity. Many instruments available in the derivatives market have a high degree of liquidity.
Unlike the stock exchange , the derivatives financial market provides for trading in secondary instruments. In other words, acquiring derivatives, you do not become a shareholder. You have the right, or, conversely, the obligation to purchase or sell a share in the future.
The standardization of this process is the responsibility of the exchange, which introduced the specification for each derivative instrument.
The specification is a document that is approved by the exchange. However, it contains the following data:
- exhaustive and abbreviated name;
- type of contract (it can be settlement or delivery);
- the cumulative amount of the underlying asset concentrated in the 1st contract;
- terms in which the requests were made;
- the approved date of delivery of the underlying asset;
- the smallest fluctuation (step) cost;
- price step cost.
The main asset of a forward contract means the asset with which the transaction will be concluded. At the same time, it performs the function of the subject of a futures contract. It can represent stocks, commodities, currency pairs or indices. They act as the subject of a transaction, which are concluded between the seller of a futures contract and the one who buys it.
The role of the main asset of futures that are sold and bought on the derivatives market can be performed by:
- bond, as well as interest rates;
- all sorts of products (in this case we can talk about precious metals, agricultural products, oil, electricity).
At the same time, the date of execution and the maximum term for the circulation of urgent contracts are often identical.
Functions of the derivatives market
The main functions performed by the derivatives market include:
- financial risk hedging (i.e., market participants receive insurance against adverse economic situations);
- sending data to agents (the value that is generated in the derivatives market affects the future situation);
- speculation (participants in the derivatives market have a lot of opportunities to make speculative profits).
US forward markets
The very first such exchange was founded in the United States in the middle of the 19th century. She was the Chicago Board of Trade, abbreviated as SVT. At the moment, it is among the largest futures exchanges that only exist in the world.
However, there are other major futures exchanges in the United States. In this case, we are talking about the Chicago Mercantile Exchange (CME), the New York Chamber of Commerce (NYBOT), the New York Mercantile Exchange (NYMEX) and its division called COMEX.
Russian derivatives market
The main Russian platform, in the framework of which is carried out by futures trading, as well as options, is FORTS. The main organizer of the auction is the Moscow Exchange .
Today FORTS has the most instruments in the territory of the Russian Federation. The participants of this exchange trade in various currencies, securities, various products, interest rates.
It is noteworthy that when concluding a futures agreement, the seller does not need to provide the main asset, and the buyer does not have to pay. Such a transaction is carried out as follows. The accounts of two parties interested in the transaction are accompanied by a pledge (collateral). Its size may vary in the range of 2% -30% of the price of the underlying asset.
7 reasons to choose a futures market
There are many answers to this question. As against the spot market, an urgent stock exchange stands out:
- The lowest commissions. Here the minimum commission payments among all markets are fixed.
- Built and completely free shoulder.
- Low cost of collateral for contracts. For example, in order to trade futures or options, it is necessary to have only 10% -15% of the price of the underlying asset.
- More convenient and flexible trading mode. If we compare the urgent and stock markets of the MB, then the first closes at 23:50, and the second ends to function already at 18:45. This feature allows traders to reproduce the opportunities that appear on world markets. That is, they can extremely effectively manage their own position.
- The presence of a wide range of tools. As part of the term exchange of MB, trading in futures and options on securities, interest rates, all kinds of goods, etc. is carried out. All this creates fertile ground for the formation of speculative strategies that allow to take into account any situation in the financial markets.
- Extremely effective insurance. With futures and options, you can hedge positions in other markets with minimal risk. For example, if the value of the underlying asset changes, the market participant will avoid serious losses.
- A small threshold for entering the auction. Thanks to the available collateral, which is characteristic of futures contracts, anyone can enter the exchange with a small amount of finance.