Futures or futures contract are one of the most popular instruments on the stock exchange. Futures trading occupies a significant segment of the exchange market.

The secret to the popularity of this financial instrument lies in its high liquidity and the ability to choose from a large number of investment strategies. For novice traders, this segment of exchange trading seems complex and risky, but for experienced players it offers many opportunities, including hedging risks.

Futures contract. What it is?

So what are futures? The term comes from the English word future, meaning “future”. This emphasizes the fact that the contract is concluded for the actual completion of a transaction in the future.

Futures contract is an agreement in which the current market price of a commodity or asset is fixed, but the transaction itself will be carried out on a specific date in the future

The essence of the agreement is that the parties to the transaction come to a common opinion on the price of the goods and at the same time agree to defer payments under the contract. This type of agreement is very convenient for each of the parties, since it insures against situations when some serious changes in the market situation provoke fluctuations in market prices.

The purpose of such a contract is to attempt to reduce risks, maintain planned profits and obtain a guarantee of delivery of goods. A futures contract relieves a market participant from urgently searching for someone to sell or buy a commodity from. The exchange acts as a guarantor of fulfillment of the terms of the transaction.

Example of a futures contract

A traditional example of a futures contract would be a transaction between an agricultural producer and a buyer. The farmer speculates how much he wants to sell his goods for in order to recoup the costs of growing and make a profit. If this amount is approximately equal to the current market value, he signs a futures contract with the buyer for the supply of agricultural products at the current price, but after a certain period of time - for example, 6-9 months, that is, as long as it takes to grow the crop.

If the price of products falls during this time (for example, the year will be fruitful and there will be an oversupply of products), the manufacturer will nevertheless be able to sell the goods at the price specified in the contract. But even in the opposite situation, if there was a bad year and product prices rose, the manufacturer will have to sell at a price that is now unprofitable, but pre-specified in the contract. The whole essence and meaning of a futures contract is to fix the price of a commodity.

The assets of a futures transaction, in addition to real goods, are stocks, bonds, currency pairs, interest rates, stock indices, etc.

Futures trading. What are the advantages?

The high popularity of futures on the stock exchange is not accidental; the advantages of this financial instrument are as follows:

1. The ability to widely diversify a trader’s securities portfolio due to access to a large number of instruments.
2. High liquidity of contracts and the ability to choose different financial strategies: risk hedging, various speculative and arbitrage operations.
3. The commission for purchasing futures is lower than on the stock market.
4. A guarantee of usually no more than 10% of the value of the underlying asset allows you to invest not the full value, but only a part, in futures contracts, but at the same time use the leverage that arises when using a futures contract.

However, the investor needs to keep in mind that the amount of the collateral may vary throughout the entire life of the contract, so it is important not to lose sight of futures quotes, monitor these indicators and close positions on time.

The futures price is also unstable. Its fluctuations allow you to track the futures chart. During the circulation period, the value constantly changes, although it depends directly on the value of the underlying asset. The situation when the futures price exceeds the value of the asset is called “contango,” while the term “backwardation” means that the futures turned out to be cheaper than the underlying asset. On the expiration date, there will no longer be such a price difference between the futures and the asset itself.

Types of futures contracts

There are two main types of futures contracts: settlement and delivery.

Futures contracts gave birth to the commodity market. The participants in the transaction agreed on a price that suited both parties and on a deferred payment. This type of transaction guaranteed both parties protection from sudden changes in market sentiment. Therefore, initially only supply contracts were in force, that is, those involving the delivery of real goods.

On the current Russian derivatives market there are delivery contracts that ensure the delivery of shares directly, but there are quite a few of them. These are futures for shares of Gazprom, Sberbank, Rosneft, for some types of currencies and options

Today, futures contracts are primarily settlement contracts and do not impose an obligation to deliver commodities. Traders prefer to trade assets that are more convenient for them (currencies, RTS index, shares, etc.). The fundamental difference between settlement futures and delivery ones is that delivery of the commodity or underlying asset does not occur on the last day of the contract. On the expiration date, profits and losses are redistributed between the parties to the contract.

The conditions for concluding a futures contract are standard, they are approved by the exchange. In addition to this scheme, personal conditions (or specifications) are prescribed for each asset, which includes the name, ticker, type of contract, size/number of units, date and place of delivery, method, minimum price step and other nuances. More detailed specifications of any futures on the Forts market can be found on the Moscow Exchange website.

The difference between futures and options is that the former oblige the seller to sell an asset, and the buyer to purchase an asset in the future at a fixed price. The guarantor of the transaction in both cases is the exchange.

Today, exchange trading experts recognize that in many ways it is futures contracts that set the pace for economic development, setting the bar for supply and demand in the market in advance.

When a novice trader first enters the stock exchange, his head is spinning from a wide variety of terms: futures, options, variation margin, expiration. Here the main question is not how to trade, but how to understand others in the first place. Therefore, let’s talk further about what a futures is in simple words.

Simple example

The most common example that is given when trying to explain to a person inexperienced in stock exchange terminology what futures are and what they are used for is farming. So, imagine that you are a farmer. You plan to plant a field of corn and sell the crop in the fall for, say, $1,000. The current price allows you to make such a profit. However, how the price will fluctuate in the future is unknown. Therefore, the farmer goes to the stock exchange and enters into a futures contract, which will cover all the risks. As a result, if you sell grain in the fall for only $900, the futures transaction will cover the difference and you will receive the planned amount. If you sell for 1100, then you will have to reimburse $100 in futures. However, you will still remain with your own people and risk nothing.

Thus, a futures is a transaction (contract) between two market participants, under which one undertakes to sell and the other to buy an asset. In this case, the futures contract is binding on both parties.

In more formal terms, futures contracts on the stock market are a market instrument (derivative) that is derived from an underlying asset. Moreover, the underlying asset of a futures contract can be not only farm goods, such as grain, sugar, but also oil, precious metals, currencies, and shares.

Who trades futures

Those who trade futures on the exchange can be divided into two main groups:
Hedgers who insure their risks for the future, as was the case with the farmer. This also includes shareholders. Hedging with futures contracts allows them to avoid losses in the future and receive dividends.
Traders are also speculators who make money from price fluctuations.

Forward and futures contracts

The main difference between a forward contract and a futures contract is that:

A forward contract is concluded outside the exchange once;
Futures contracts are traded on an exchange many times.

Types of futures contracts

There are different types of futures: delivery and settlement or non-deliverable.

Deliverable - from the very name it is clear that it obliges the buyer to purchase and the seller to physically deliver the product underlying the future upon the arrival of a previously agreed date. The quantity of goods is fixed in the contract specification. If the supplier does not have the goods, the exchange may impose a fine on such an unscrupulous seller.
The settlement futures contract does not provide for any delivery. Only monetary settlements occur between the two parties to the transaction. It is this type of futures that is used to hedge risks in case of unfavorable price fluctuations.

forts futures specification

Each futures has its own specification - a special document that spells out the main points of the contract. As a rule, the futures specification specifies the following parameters:

His name;
Abbreviation;
Type - calculated or delivered;
The quantity of goods (underlying asset) provided for in the contract;
The period during which the futures are valid;
The date on which the asset will need to be delivered;
The minimum step by which the price will change;
The cost of this minimal step.

The language of stock traders seems like complete gobbledygook to an untrained person: forward, futures, hedging, options. Although, these words hide quite understandable actions. This is not an attempt to close ourselves off from the uninitiated, it’s just more convenient.

What is a futures contract

The meaning of the term “futures” can be understood based on the translation from English of the word future - future.

Futures (futures contract): a transaction, the price and quantity of goods for which are fixed at the time of signing the contract, and obligations (the need to pay for the transaction) will arise through futures-determined time.

“Specified time” must be at least more than two business days. Otherwise, this transaction is called differently.

Simply put, futures are risk trading. At the same time, the counterparty, who does not want to take risks, offers his future product at a favorable price. For this he receives guaranteed sales. The buyer, at his own risk, may receive the product at a lower price in the future.

The difference between a futures contract and a forward contract is that forward- This is a one-time, non-standardized, over-the-counter transaction. Futures are traded on the exchange, and constantly.

Often, after the deadline, no real deal occurs, it is done payment of the difference between the contract price and the actual market price on the day specified in the contract.

Let’s say that in the spring a farmer places a futures contract on the stock exchange to sell wheat at $100 per barrel. In the fall, the price of wheat at the time of purchase of goods is $110 per barrel. That's 10% net profit. And perhaps in a month it will be $130 per barrel.

In this case, the farmer is a hedger (), and his buyer is a speculator. This word still has a negative connotation in our country, although a stock speculator is a player who makes money on risky operations. The price could fall to $90, then the speculator would be in the red.

Read more about the difference between futures and options. Although these concepts are very similar, there are also differences.

Index futures

Often in the economic section of the news the following words are heard: Dow Jones index, Nasdaq, RTS (Russian stock index). The value of these indices is calculated from a variety of indicators of the economy to which the index relates.

The first of those listed are American. The Dow Jones Industrial Average characterizes the market position of the 30 largest US companies. Nasdaq deals with shares of high-tech corporations.

Futures contracts can be concluded not only for the supply of goods, but also for changes in indices. Such futures are called index futures. Here, profit (or loss) is the change in the value of the index on which the transaction was concluded. The contract specifies the price of one point; at the end of the futures, settlements are made.

The purpose of concluding a contract may be to speculate on changes in the index or to hedge the securities included in the calculation of this indicator.

Remains the most popular on Russian exchanges RTS index futures, which is characterized by:

• high liquidity;
• minimal costs;
• maximum leverage.

When entering into an index futures contract, all buyer-seller relationships happen through the exchange, without the need for direct contact. Both accrual of profits and write-off of losses.

Upon expiration of the contract, each participant in the transaction, based on the trading results, will be credited (or debited) with the amount of the difference between the futures and the real, the exchange receives its percentage for intermediation.

Gold futures

Just like regular futures, a gold transaction has the same principles, only the underlying asset is gold. Futures can be (similar to other types of contracts):

The benefit of gold futures is that the exchange provides leverage of 1:20. That is, to carry out transactions, a security amounting to 5% of the transaction amount is sufficient. But the risk increases proportionally.

Actions that provide an opportunity to make a profit or reduce risks:

• purchase in anticipation of an increase in metal prices;
• purchase in anticipation of a decrease in metal prices;
• trading using exchange leverage;
• hedging losses from rising gold prices;
• hedging losses from a decrease in the price of gold.

Oil futures

Oil futures are traded on the following exchanges:

Currently, only 2% of futures transactions are carried out by real oil suppliers and consumers who hedge their risks. The remaining 98% of transactions are made by speculators.

Electronic trading on stock exchanges, There is no physical delivery of oil. At the end of trading, settlements are made between the parties to the futures.

The benefit of working in this market is the provision of leverage (1:6), the minimum lot is 10 barrels. Therefore, you can start earning money by investing a symbolic amount - a little more than 7,000 rubles.

Just as in the case of gold, the presence of leverage represents both greater gains and losses, in the same proportion.

Experts believe futures transactions are the most risky. The probability of success here is equal to the probability of loss - 50/50. Therefore, it is not recommended to invest more than 20% of capital in this sector.

We recently looked at the topic. As you know, an option is a contract that gives its buyer the right to transact with an asset within a specified period at a set price. The difference between futures contracts and options is that the transaction is mandatory for the buyer of the futures in the same way as for the seller. In this article, I will cover the basic concepts of futures trading.

Basic concepts of futures contracts and examples

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A futures contract (or simply futures) is a contract under which the buyer agrees to buy and the seller agrees to sell an asset by a certain date at a price specified in the contract. These contracts are classified as exchange-traded instruments because they are traded exclusively on exchanges under standardized specifications and trading rules. The counterparties stipulate only the price and execution date. All futures can be divided into 2 categories

• Supply;
• Calculated.

Deliverable futures involve delivery of an asset on the contract execution date. Such an asset can be a commodity (oil, grain) or financial instruments (currency, shares). Settlement futures do not provide for the delivery of an asset and the parties make only cash settlements: the difference between the contract price and the actual price of the instrument on the settlement date. A more detailed classification of futures is based on the nature of the assets: commodities or financial instruments:

Initially, futures arose as delivery commodity contracts, primarily for agricultural products: in this way, suppliers and buyers sought to protect themselves from risks associated with poor harvests or storage conditions of products. For example, the world's largest Chicago Mercantile Exchange (CME) was created in 1848 specifically for trading agricultural contracts. Financial futures appeared only in 1972. Even later (in 1981), the most popular futures for the S&P500 stock index appeared today. According to statistics, only 2-5% of futures contracts end in delivery of the asset. Tasks such as hedging transactions and speculation come to the fore.

Each futures has a specification that may include:

• name of the contract;
• type (settlement or delivery) of the contract;
• contract price;
• price step in points;
• circulation period;
• contract size;
• unit of trade;
• delivery month;
• date of delivery;
• trading hours;
• delivery method;
• restrictions (for example, on fluctuations in the contract currency).

During the time before the execution of a futures contract, the spot price of an asset can be either higher or lower than the contract price, depending on this, futures states are distinguished, called contango And backwardation.

• Contango– a situation in which an asset is traded at a lower price than the futures price, i.e. Transaction participants expect an increase in the price of the asset.
• Backwardation– the asset is traded at a higher price than the futures price, i.e. Transaction participants expect a price reduction.

The difference between the futures price and the spot price of an asset is called basis futures contract. For example, in the case of contango the basis is positive. On the day of delivery, the futures and spot prices converge to within the cost of delivery, this is called convergence. The reason for convergence is that the asset storage factor ceases to play a role.

In the event that there is a consistent decline in the basis of the futures contract, the dealer can play on this. For example, buying grain in November and simultaneously selling futures for delivery in March. When the delivery date arrives, the dealer sells the grain at the current spot price and at the same time makes the so-called offset transaction at the same price, buying futures. Thus, hedging price risk through futures allows you to recoup the costs of storing goods. Just like other exchange instruments, futures allow you to apply traditional methods of technical analysis. The concepts of trend, support and resistance lines are valid for them.

Margin and financial result of a futures contract

When opening a transaction with a futures contract, insurance coverage, called deposit margin, is blocked on the account of each of its participants. It usually ranges from 2 to 30% of the contract value. After the transaction is completed, the deposit margin is returned to its participants. Sometimes situations arise in which the exchange may require additional margin. This situation is called.

Typically this is due to . If a transaction participant is unable to deposit additional margin, he is forced to close the position. In the event of a massive closing of positions, the price of the asset receives an additional impulse to change. For example, when long positions are closed en masse, the price of an asset may fall sharply. On the FORTS market, the guarantee for delivery futures 5 days before execution increases by 1.5 times. If one of the parties refuses to fulfill the terms of the contract, the blocked amount of the guarantee security is withdrawn as a penalty and transferred to the other party as compensation. Control over the fulfillment of financial obligations by the parties to the transaction is carried out by the clearing house.

In addition, every day at the close of the trading day, a variation margin is accrued to the open futures position. On the first day, it is equal to the difference between the price at which the contract was concluded and the closing price of the day (clearing) for this instrument. On the contract execution day, the variation margin is equal to the difference between the current price and the last clearing price. Thus, the result of a transaction for a specific participant is equal to the amount of variation margin accrued for all days while the position under the contract is open.

The financial result of the transaction is equal to VM1+VM2+VM3=600-400+200=400 rubles.

If the futures are settled and are purchased for speculative purposes, as well as in a number of other situations, it is preferable not to wait for the day of its execution. In this case, the opposite transaction is concluded, called offset. For example, if 10 futures contracts were previously purchased, then exactly the same number must be sold. After this, the obligations under the contract are transferred to its new buyer. On the New York Mercantile Exchange NYMEX (organizationally part of the CME), no more than 1% of open positions in WTI reach delivery. An important difference between a settlement futures and a deliverable one is that when a settlement futures position is open, the guarantee margin does not increase on the eve of execution. The final price on the execution day is based on the spot price. For example, in the case of gold futures, the London fixing on the COMEX (Commodity Exchange) is taken.

Futures and contracts for difference: similarities and differences

The arithmetic of calculating profit when trading settled futures is reminiscent of a popular class of derivative instruments called CFD (Contract for Difference, contract for difference). By trading CFDs, a trader makes money on the difference between the prices of an asset when closing and opening a trading position. The asset can be shares, stock indices, exchange commodities at spot prices, futures themselves, etc. The main similarities and differences between futures and CFDs can be presented in table form:

Tool	CFD	Futures
Traded on the stock exchange	No	Yes
Has a due date	—	Yes
Traded in fractional lots	Yes	No
Possible delivery of asset	No	Yes
Restrictions on short positions	No	Yes

Unlike futures, CFDs are traded with Forex brokers along with currency pairs, but not around the clock, but during trading hours on the relevant exchanges that deal with specific underlying assets. One of the most liquid futures contracts traded in the Russian FORTS system is RTS index futures. It is listed as a CFD on the streaming quote chart investing.com/indices/rts-cash-settled-futures.

However, it is important not to confuse an exchange-traded instrument with an over-the-counter instrument. The fundamental difference between them is that the price of an exchange-traded instrument is determined by the balance of supply and demand during trading, while dealing centers only allow you to place bets on the rise or fall of the price, but not to influence it. Among the most liquid futures contracts, we should mention, first of all, futures for stock indices and oil. On American exchanges, futures for the Dow Jones and S&P500 indices are traded on the Chicago Mercantile Exchange, and oil futures are traded on the New York Mercantile Exchange NYMEX.

The most popular futures on the Moscow Exchange are for the RTS index (30% of the total futures trading turnover) and for the US dollar - ruble pair (60% of the turnover). According to the specification, the contract price for the RTS index is equal to the index value multiplied by 100, and the cost of the minimum price step (10 points) is equal to $0.2. Thus, today the contract is trading above 100 thousand rubles. This is one of the reasons why non-professional traders choose more affordable CFDs.

For example, the minimum lot for CFD RUS50 (RTS index symbol) is 0.01, and the price of 1 point is $10, so with a maximum leverage of 1:25, a trader can trade the index with $500 in his account. In total, CFDs are available to the company's clients on 26 index and 11 commodity futures. For comparison, the largest one in Russia offers CFD trading on only 10 index and 3 commodity futures.

There are exchange goods for which the concept of market price has no direct economic justification. First of all, it is oil. The first futures transactions in the oil market were made in the early 1980s. But in 1986, the Mexican oil company PEMEX was the first to link spot prices to futures prices, which quickly became the standard.

With global oil production of all grades less than 100 million barrels per day, on the London ICE Futures Europe platform an average of about a million futures contracts for Brent oil are concluded per day. According to the specification, the volume of one contract is 1000 barrels. Thus, the total volume of oil futures traded on this one platform is approximately 10 times higher than global oil production. Small (about 1 million barrels or less) changes in WTI oil reserves in the United States are not able to affect supply, but lead to futures trading. On November 29, 2016, trading in Urals oil futures was launched on the St. Petersburg International Mercantile Exchange (SPIMEX).

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