Chapter 11. Futures Trading

Futures trading is most simply explained by an example. Suppose there is a seller who wants to sell 1 ton of grain. He can sell this grain on the cash market (spot market, spot). Thus, the seller will give the grain to the buyer and in return he will receive money. Consequently, the transaction will take place at a certain point in time, at a certain place, and will, in fact, be a completed transaction. This means that both parties got what they wanted: the buyer got the goods and the seller got the money for them. Most ordinary goods are sold this way.

But the seller has another possibility. Let’s imagine that he sells not grain, but an obligation to deliver grain to the buyer at a certain fixed time. This commitment is called a futures contract. It should be said that, unlike the sale of goods on the spot market, the transaction in futures trading remains incomplete. That is, the buyer has already paid the required amount and received the seller’s commitment in return. But he has not received the goods themselves. Besides, the seller does not receive all the money for 1 ton of grain, but only a part of it. He will receive the rest only when he delivers the goods to the buyer. Thus, the buyer becomes the owner of a futures contract, which he can keep for himself and buy, after all, a ton of grain or, in turn, sell it on the futures market. And it doesn’t matter what the buyer does with the contract as long as it remains unexecuted. The main thing is that the seller has undertaken to deliver grain of the agreed quality on a specified date for a specified amount, and the futures owner (i.e., the buyer) has undertaken to accept the delivered commodity and pay the balance of its price.

Consequently, a futures contract will obligate both the seller and the buyer. In its principle, futures repeat the principle of options. But, in the case of options, the obligation is imposed only on the seller, and the buyer of the option can either buy (sell) the underlying asset or not exercise this right. Then, unlike in the case of a futures contract, the buyer does not need to pay any additional amounts, because he has already paid the option premium, which he risks. Well, the seller of the option receives the premium in any case, but risks the delivery of the underlying asset. From this example, we can derive a classic definition of futures.

Futures or futures contract (futures) is a derivative financial instrument, a standard futures exchange contract for the purchase and sale of the underlying asset, concluding which the parties stipulate only the price level and specify the delivery date of the underlying asset, without any obligations to the exchange until the futures maturity date.

Each exchange for futures trading has different requirements for futures contracts, which may include not only the delivery procedure and its date, but also the quality of the commodity and its quantity. Futures contracts can last either a few months or up to more than three years.

You can get more detailed information about futures trading in the corresponding section (futures trading) of the Forex Arena information portal.