Futures’ trading is a part of trading. However, futures’ trading is a little more complicated as a concept when compared to the concept of trading.
There is usually a contract in futures trading. The contract is nothing but an agreement between two parties. The two parties decide to sell or buy a particular asset at a certain price and at a certain time in the future. This contract usually comprises of a standardized month and date of delivery along with the price and quantity.
Futures’ trading is carried out on most occasions on a futures exchange. In terms of delivery requirements and margin, futures are different from forwards. There are certain standard features in the futures trading contract so as to bring in liquidity in the futures trading.
By entering into an opposite and equal transaction, a futures contract may be prior to maturity in futures trading. Most of the future trading transactions are offset. Infact, a study shows that more than 99% of the future trading transactions are offset in this manner. The date which is mentioned in the futures trading contract is known as the expiry date. The price of the futures contract at which it trades in future market is known as the Futures price. The last Thursday of the respective month is usually the expiry date of the futures contract in futures trading. Futures contracts are available in three series. The three series of futures contracts are divided as three months, two months and one month expiry cycles. A brand new contract with a three month expiry is introduced on the Friday which follows the last Thursday which was the original date of expiry.
There are many important roles that the futures’ trading performs. Aiding the entire process of proper price discovery is probably the most important role that the concept of futures’ trading performs. This is because many different kinds of players are involved in trading futures. Aiding the hedge of price risk in a commodity is also another important role that the futures’ trading performs.
Futures’ trading is a way of stepping into the future and predicting the future when it comes to pricing different kinds of commodities.
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