Chapter 12. Settlement and delivery futures

Futures are divided into two types: settlement futures and delivery futures. Settlement futures (non-deliverable futures) are used when only cash settlements are made between the parties, while there is no physical delivery of the underlying asset. Thus, the seller does not deliver the commodity after a specified period of time. The exchange settles between the parties. Settlement futures are used to purchase an underlying asset such as a stock index or currency.

A deliverable futures contract is used to buy or sell a specified quantity of the underlying asset (oil, securities, currency) at a specified time (contract execution date). Suppose an investor enters into a futures contract for oil. On the agreed date, the seller of the futures contract is obliged to deliver this asset to him at the price specified in the futures contract, and the investor is obliged to buy this commodity. If, at the time of purchase, the price of oil has increased, the investor (buyer) buys it for a lower value and therefore remains in favor. However, the price of oil may fall and when the time comes to pay for the delivery, the buyer will have to pay the contracted price, which will be higher than the market price. Thus, the investor suffers a loss. The risk of working with futures lies in the possibility of such a situation.

The buyer of a commodity who has concluded a futures contract can make a profit by selling the futures contract on the condition that the market price of the commodity specified in it by the time of settlement of the futures contract will be lower than the price at which he will be obliged to repurchase the commodity.

Futures were first traded on the Chicago Exchange in the second half of the century before last, and since then they have been traded on a par with such familiar investment instruments as stocks and the like. Along with futures, options also play a significant role in the stock exchange, as their use, despite a certain complexity, gives a rather high potential for trading operations.

It should be said that the stock exchange closely monitors all operations with futures and options. It controls the settlement of these transactions and the corresponding delivery of the underlying assets. In the following chapters, we will begin to look at the concept of a stock index. In addition, you will get information about indices, which are the main indicators of the world economy.