Future contracts Basics

Future Contracts
A standardized agreement between buyer & seller in which seller have to deliver a specific assest for a fixed price to buyer on specific date & time on future basis or  in other words it is an zero –sum game between buyers & sellers. Future contract was established in 1848 the Chicago Board of trade (CBOT) one of the oldest future exchange in united states. Future contracts include few aspects such as the identity of an underlying commodity, size of the future contract, its expiration date, procedure to follow and the future price.

Assets involved in Future Trading 

Agriculture Goods (wheat, maize) etc
Natural Goods (oil, natural gas) etc
Fixed Income Securities (T-Bonds)
Foreign Currencies (pounds, marks) etc
Market Indices (S+P 500, value line) etc

Clearing House Functions
-A orderly and stable meeting place for buyers & sellers
-Safe the parties for huge losses
 For a future contract to go an initial and maintenance margin set up

Future trading accounts
A future exchange allow exchange members to trade, exchange trader may be a individual firm or a brokerage firm.

Market Participants

1. Hedgers- Hedgers are those traders who transfer price risk from an existing position. Hedgers are those traders who buy & sell in spot market in order to reduce the risk associated.
2. Speculators - These types of traders buy & sell on future contracts basis with the aim of hoping maximum profit return.

Marking Market - The process of maintaining an investor’s account in equity in order to settle the price for future contract, each day a new contract is set up while replacing the old ones. The settled price is assumed to be the purchase price of that day. On the basis of that fixed price a contract is set up. Now to these whole process price limits are set up.

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