Futures contract
Futures contract - a contract for purchase / sale of certain assets (goods) which are subject to mandatory standards, and the date of delivery is clearly defined. Like any other contract, futures contract contains a price, but the total price of the asset is paid on the day of delivery. But on the stock exchange rules, the seller and the buyer is obliged to make some money, which will serve as a guarantee to fulfill their obligations: the seller warrants that will put an asset (commodity) in the period, the buyer warrants that the contract will pay on the day of delivery. This deposit is called margin, and usually does not exceed 10% of the real value of the contract.
Futures contracts are freely reversible and can communicate only through public auction on the official markets.
Turn on the stock exchange two types of futures contracts: contracts with physical delivery and contracts that provide cash.
Having bought at the exchange deliverable futures contract, the buyer agrees to accept and pay for a period stated in the contract quantity. At the time of purchase of a futures contract, the buyer becomes the owner of the goods legally. Seller of a futures contract, in turn, undertakes to deliver the goods at the stated time and in the claimed amount in the contract.
Statistics show that the real ending supply of not more than 2% of all prisoners of futures contracts. This is explained by the fact that the stock is allowed to resell the purchased before the contract, thus, transfer of ownership of the asset (commodity) that contract to another market participant.
Consider this example:
Miller bought from the farmers at the beginning of March futures contract for wheat for delivery in June, at $ 5 per bushel. Due to the earthquake / fire / flood / i.t.d. In April, Miller loses the opportunity to fulfill their contractual obligations. Having signed a new futures contract to sell the same quantity of wheat for the same period, Miller conveys all the rights of wheat and all contractual obligations to third parties. If at the conclusion of the contract for the sale price was higher than the original, besides the fact that Miller will get rid of his duties, he can get, and profits .
In the real market, few speculators have the ability and willingness to 3000 bushels of wheat, or 100,000 pounds of sugar. Therefore, most futures speculators are trying to get rid of the contract before the date of delivery.
Despite the fact that so few prisoners futures contracts run out of real delivery, the delivery condition is optional. This is because buyers and sellers are given the opportunity to make or take delivery of actual goods, if they need it. In addition, the terms of the actual delivery helps market participants to properly evaluate the futures market relative to cash. This means that at the time of delivery, the price of the futures and the futures market should match or be very close. Approximation of prices occurs as the futures contract approaches the delivery time. Otherwise, investors would buy at a cheap and sold on a more expensive market, as long as price is not agreed to.
Cash-settlement futures contracts are characterized in that at the end of the contract is cash mutual settlement, rather than the supply. On the last day of trading in such contracts quoted price is taken as equal to the cash price of the underlying asset is carried out clearing and then close all open contracts.
