Before a futures contract is put into circulation, the exchange determines the trading conditions for it, which are called “specifications”. This document contains information about the underlying asset, the number of units of this asset, the expiration (execution) date of the future, the cost of the minimum price step, etc. An example of such a specification is the description of the RTS Index futures.

There are two types of futures - settlement and delivery. In the case of the latter, physical delivery of the underlying asset is allowed - for example, oil or currency. It happens that such delivery is not implied and the futures are settlement. Then, at the time of its expiration, the parties to the transaction receive the difference between the contract price and the settlement price on the expiration day, multiplied by the number of available contracts. Index futures are referred to as settlement ones, since they cannot be delivered.

When trading futures contracts, the value of the position is recalculated daily in relation to the previous day and money is written off/credited to the investor’s account. That is, the difference between the purchase or sale price of a futures contract and the estimated expiration price is credited to the trader’s account daily - this is the concept of variation margin.

Futures have an expiration date, which is encoded in their name. For example, in the case of the RTS index, the name is formed as follows: RTS -<месяц исполнения>.<год исполнения>(for example, the RTS-6.14 futures will expire in June 2014).

How it works

As is clear from the history of futures contracts, one of their main purposes is insurance against financial risks (so-called hedging) - for this purpose, this instrument is used by real suppliers or consumers of the commodity that is the underlying asset. Experienced traders and investors use futures (often settled) for speculation and profit.

Futures are a fairly liquid instrument, which, however, is unstable and, accordingly, carries considerable risk for the investor.

When a futures contract that one trader has sold to another comes due, there are generally several possible outcomes. The financial balance of the parties may not change, or one of the traders may make a profit.

If the price of a financial instrument has increased, then the buyer wins, but if the price falls, then the seller celebrates success, who most likely was counting on this. If the price of the instrument does not change, then the amounts in the accounts of the participants in the transaction should not change.

Unlike an option, a futures is not a right, but an obligation on the part of the seller to sell a certain amount of the underlying asset in the future at a certain price, and for the buyer to buy it. The guarantor of the execution of the transaction is the exchange, which takes insurance deposits (collateral) from both participants - that is, you do not need to pay the entire futures price at once, only the collateral is frozen in the account. This procedure is performed on both the buyer's account and the seller's account in the transaction.

The amount of collateral (GS) for each contract is calculated by the exchange. At the same time, if at some point the funds in the investor’s account become less than the minimum acceptable level of GO, the broker sends him a request to replenish the balance, but if this does not happen, then some of the positions will be closed forcibly (margin call). To avoid such a situation, the trader must keep an amount of money in the account that is quite significantly larger than the amount of security - after all, if the price of the futures changes significantly, then his funds may not be enough to cover the position. The collateral is frozen in the merchant's account until the transaction is settled.

At the time of writing, the current value of the guarantee collateral charged to clients wishing to trade futures on the RTS index is 11,064.14 (more details). Accordingly, if a trader has 50,000 rubles in his account. That is, the trader will be able to buy only 4 such contracts. In this case, an amount of 44,256.56 rubles will be reserved. This means that only 5,743.44 rubles of free funds will remain in the account. And if the market goes against a certain number of points, then the expected loss will exceed the available funds, and a margin call will occur.

As you can see, a lot depends on the futures price, which can change under the influence of a variety of factors. Therefore, this exchange instrument is classified as risky.

Why do we need speculation and futures?

Very often, people who are not very familiar with the specifics of the stock market confuse it with Forex (although this is not particularly fair) and brand it as some kind of “scam” where speculators fleece gullible newcomers. In reality, everything is not so, and stock speculation plays an important role in the economy. Speculators buy low and sell high, but in addition to the desire to get rich, they influence the price. When the price of a stock or other exchange instrument is undervalued, a successful speculator buys - which causes the price to rise. Similarly, if an asset is overvalued, then an experienced player can make a short sale (selling securities borrowed from a broker) - such actions, on the contrary, help reduce the price.

When there are many stock market professionals who look at the stock market from different angles and use a large amount of data to analyze both the situation in the country and about a specific company, their decisions have an impact on the entire market as a whole.

In the same way, to imagine the role of futures, it is worth imagining what would happen if this financial instrument as such did not exist. Let's imagine that an oil producing company is trying to predict the required production volumes. Like any business, the company wants to achieve maximum profit with minimal risk. In this situation, you cannot simply extract as much oil as possible and sell it all. It is necessary to analyze not only the current price, but also what level it may be in the future.

At the same time, those who extract, transport and store oil are not necessarily analysts and have access to the most complete forecasts regarding the possible price of oil. Therefore, the producing company cannot know exactly how much a barrel of oil will cost in a year - $50, $60 or $120 - and produce the corresponding volume. To get a guaranteed price, the company simply sells futures to minimize risk.

On the other hand, the stock speculator from the example above may consider that the price of a particular futures is too high or low, and take appropriate action, leveling it to a fair price.

At first glance, the importance of setting a fair price in the market does not seem so necessary, but in fact it is extremely important for the fair use of society's resources. It is on the stock exchange that capital is redistributed between countries, economic sectors and enterprises on the one hand, and various groups of investors on the other. Without the stock market and the instruments with which it functions (including derivatives), it is impossible to effectively develop the economy and meet the needs of each specific member of society.

What is futures? The essence of any futures contract is a deferred payment, i.e. Today, the parties to the transaction reach an agreement on the price at which in the future the seller will sell and the buyer will buy the asset underlying the futures.

In other words, what is futures is an analogue of a dispute between two parties to a transaction regarding the price of the underlying asset in the future. For example, the underlying asset is shares - in this case, the buyer of the futures bets on an increase in the price of Sberbank shares in the next 3 months, and the seller of the futures bets on a fall in the market value of Sberbank shares over the same 3 months.

After three months, the theoretical price is compared with the current market price, resulting in one side of the trade being a winner and the other side a loser. A futures contract is an obligation, so the losing party is obligated to pay the winning party the difference in price (at their own loss). In practice, the transfer of the final difference is carried out automatically without the participation of the trader and is a function of the exchange.

What is a futures and what is it for?

When a trader simply buys a share (i.e. pays money and immediately receives the share in his account) - this is a regular transaction, just like, for example, he goes to a store, pays for an item and immediately receives it. Why is it necessary to negotiate a price for future supplies?

For clarity, you need to imagine a farmer growing wheat. A great harvest requires labor, fertilizer, seeds and more, and that requires money. When growing wheat, a farmer cannot be completely sure that when the harvest time comes, the price at which he sells the goods will cover all expenses. Obviously, this carries a huge risk, and not every farmer will decide to take on such responsibility.

Using a futures contract, a farmer can already today fix the price at which the crop will subsequently be sold (this can be for a period of 6 or 9 months). Thus, he will neutralize the risk of price fluctuations and will be able to plan his business. From agriculture, the ideology of futures was intercepted by other sectors of the economy (gas, metals, etc.).

What is futures for a speculator?

This instrument is especially popular among speculators who make profit from fluctuations in stock prices, because has a number of advantages over conventional stock trading (namely, low commission, increased leverage, the procedure for calculating exchange rate differences, etc.). The most liquid contract on the Russian derivatives market is

Today on the Econ Dude blog we will talk briefly about futures contracts (futures) and I will give an example of how they work on the stock exchange and when trading.

In fact, most people do not need to know this, since the topic is very specialized. Even economists often do not teach this within the framework of general economic theory, because it relates to trading on the stock exchange and is more Western. But nevertheless, for everyone who is somehow connected with this trade, either professionally or simply interested, futures are a thing that sometimes occurs.

So, the word comes from the English futures contract, futures. And this word came from future - the future. A futures contract is an agreement between two parties to transact a security at a predetermined price. in future.

These contracts appeared in a rather interesting way and it was connected with. Since the production cycles of grain or cotton are quite long in terms of time, a guarantee of delivery was needed, and such contracts were such a guarantee.

Roughly speaking, the owner of the mill and bakery could agree with the farmer that he would buy grain in 6 months for $1, and the other party would deliver the goods at that moment. Such long-term contracts protected suppliers and sellers, allowing for more stable supply chains.

But then curious things happened: there was no longer a shortage of such suppliers and it was possible to buy almost any product at almost any time, the need for such contracts fell. But everyone liked the idea of ​​executing a transaction after X amount of time because it gave more predictability and stability, and they picked up on this idea.

Such contracts can be called deferred; they are very close in meaning and mechanics to orders or forwards, but there are also slight differences. Futures in general are like one of the types of forwards, the difference is that futures are traded on an exchange, but forwards are darker, one-time and private transactions outside the exchange.

Index futures were traded by Nick Lisson () , and forwards are traded, for example, by importers, for example, by concluding these contracts to purchase currency in X days in order to protect themselves from the risk of quotes jumps.

At the same time, you cannot really speculate on forwards, since they are not on the exchange, but futures can be sold at any time.

Some people, I had an acquaintance, traded futures for a long time and did not even understand that they were trading them and what it was. Like a person buys and sells oil futures without even understanding that in fact such a future involves the delivery of crude oil to him, although in fact it has been under such contracts for a long time almost they don't deliver anything. Such instruments inflate markets, including the oil price market, introducing into it a wild speculative part, when real production, extraction and consumption cease to play any role in pricing, and everything stupidly depends on the behavior of investors, and not on fundamental factors.

An example of what a futures is (futures contract) you can give this one.

Consider a classic oil futures contract:

A friend of mine was selling this without even realizing that they could naturally bring him oil. I’m kidding, of course, because if you trade this through Russia, then most likely everything is done through an intermediary, and maybe many, but the essence of the futures is exactly this: by buying one such contract, for example for $68 now, you will receive 1 barrel of crude oil. The pendos will be brought by helicopter and poured into your window.

You can read how exactly the goods are delivered at the time the futures are executed if you know English, but personally this point has been interesting to me for a long time, and it was very difficult to find information on it, even in English.

And it shows that the trading volume on the market is 1.2 million contracts, not that much in fact, this is a day trade of 81 million dollars, although on some days it is twice as much. You see there in the picture CLM18 - this is the futures of 2018, that year CLM17 was traded and so on. It was a different paper and last year’s trading has already passed, and our futures closes in June 18th year.

Now the futures is trading at $68, and the real current price is slightly different, this is called spot price, but it is difficult to find as many popular sites do not even track it, and often do not mention that they show you the futures price, not the current one.

Here are all futures prices

Russian oil is Urals, the difference in its price with others is not significant, but it exists. Russian oil is not of the highest quality, but not the worst either.

So, you can buy all these futures, through a broker and using, for example, MetaTrader you get access to all the instruments.

It is clear that real oil will not be delivered to you, but there is a redemption mechanism at the end of the contract, plus, many people play in the futures market very speculatively and buy/sell a million times a day.

Each futures contract has a specification. This is a document that contains the main terms of the contract:

• Name of the contract;
• Contract type (calculated or delivered);
• Price (size) contract - the amount of the underlying asset;
• Maturity period - the period during which the contract can be resold or bought back;
• Delivery or settlement date - the day on which the parties to the contract must fulfill their obligations;
• Minimum price change (step);
• Minimum step cost.

You can find all this, for example, on the website investing.com, it looks like this:

Below you see all the parameters of this contract

Now we are at the end of April 2018, the 26th. The contract will be executed in two months, but the price is constantly changing. At this second, enter into a contract, having purchased it, you have a fixed delivery at this price in 2 months. If something goes wrong, you can sell this futures at a different current price before June.

Futures are also used for the so-called (safety net), since they are executed at a fixed price in the future. In this way, you can be guaranteed to get one part of the equation stable, and the other to play more actively, but I will write more about this later in another article.

“Futures are very liquid, volatile and quite risky, so new investors and traders should not deal with them without proper preparation.” -

The same site reports that there are no real deliveries on futures, but in fact there are, it all depends on the type of futures.

If there is no supply, then the variation margin mechanics work.

When a futures contract is executed, if there is no delivery, the current price of the asset is compared to the futures purchase price and the exchange automatically calculates the difference, either paying you a premium or taking your money.

For example, if you buy a futures on an asset for $10 now, which expires in a year, and hold it for a year. Then, if the price has become, say, $15, then you will be charged $5, and if the price has dropped to $7, then they will charge you $3.

It is precisely because of such mechanics that exchanges require margin (Deposit margin - collateral) and a margin call may occur - automatic closing of positions. If you have no funds in your account, and your futures have fallen, while execution is still far away, then you have huge problems. You must have funds to cover potential losses at the time the futures close, this is a requirement of the exchange, and this is what led Singapore trader Nick Lisson to collapse. And that is why he constantly begged for money in London, precisely to cover this margin, and then forged documents (I'm talking about the movie "The Con Man" starring Ewan McGregor).

These are the pies. I hope the Econ Dude blog gave adequate examples and explained how futures work; you can find other articles about economics here.

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Surely you have already noticed on various financial websites, where there are currency quotes and economic news, a special section “Futures”. At the same time, there are a large number of their varieties. In this article we will talk about what Futures are, why they are needed and what they are.

1. What is Futures

Futures(from the English "futures" - future) - this is one of the liquid financial instruments that allows you to buy/sell goods in the future at a pre-agreed price today

For example, if you buy December futures in the summer, you will receive delivery of this product in December at the price you paid in the summer. For example, these could be stocks, currency, goods. The moment of completion of the contract is called expiration.

They have become widespread since the 1980s. Nowadays, Futures are just one of the tools for speculation for many traders.

What are the objectives of futures

The main purpose of futures is to hedge risks

For example, you own a large block of shares in a company. There is a decline in the stock market and you have a desire to get rid of them. But selling such a large volume in a short period of time is problematic, since it can cause a collapse. Therefore, you can go to the futures market and open a bearish position.

Also, a similar scheme is used during periods of uncertainty. For example, there are some financial risks. They may be associated with elections in the country, with some uncertainties. Instead of selling all your assets, you can open opposing positions in the futures market. Thereby protecting your investment portfolio from losses. If the futures fall, you will make money on it, but you will lose on the stock. Likewise, if stocks rise, you will make money on this, but will lose on futures. It's like you're maintaining the status quo.

Note 1

In textbooks you can see another name - “futures contract”. In fact, this is the same thing, so you can say it as you prefer.

Note 2

A forward is very similar in definition to a futures, but is a one-time transaction between a seller and a buyer (a private arrangement). Such a transaction is carried out outside the exchange.

Any futures must have an expiration date, its volume (contract size) and the following parameters:

• name of the contract
• code name (abbreviation)
• type of contract (settlement/delivery)
• contract size - the amount of the underlying asset per contract
• terms of the contract
• minimum price change
• minimum step cost

No one issues futures like stocks or bonds. They are an obligation between the buyer and the seller (i.e., in fact, traders on the exchange themselves create them).

2. Types of futures

Futures are divided into two types

1. Calculated
2. Delivery

With the first ones everything is simpler, in that nothing will be supplied. If they are not sold before execution, the transaction will be closed at the market price on the last day of trading. The difference between the opening and closing prices will be either profit or loss. Most Futures are settlement.

The second type of futures is deliverable. Even from the name it is clear that at the end of time they will be delivered in the form of a real purchase. For example, it could be stocks or currency.

Essentially, Futures are an ordinary exchange instrument that can be sold at any time. It is not necessary to wait for its completion date. Most traders strive to simply earn money, and not actually buy something with delivery.

For a trader, futures on indices and stocks are of greatest interest. Large companies are interested in reducing their risks (hedge), especially in commodity supplies, so they are one of the main players in this market.

3. Why are Futures needed?

You may have a logical question: why are Futures needed when there are base prices. The history of their appearance goes back to 1900, when grain was sold.

To insure against strong fluctuations in the cost of goods, the price of future products was set in winter. As a result, regardless of the yield, the seller had the opportunity to buy at the average price, and the buyer had the opportunity to sell. This is a kind of guarantee that one will have something to eat, the other will have money.

Futures are also needed to predict the future price, or more precisely, what the trading participants expect it to be. The following definitions exist:

1. Contango - an asset is trading at a lower price than the futures price
2. Backwardation - an asset is trading at a higher price than the futures price
3. Basis is the difference between the value of the asset and the futures

4. Futures trading - how and where to buy

When purchasing futures on the Moscow Exchange, you must deposit your own funds for approximately 1/7 of the purchase price. This part is called "guarantee security". Abroad, this part is called margin (in English “margin” - leverage) and can be a much smaller value (on average 1/100 - 1/500).

Entering into a supply contract is called "hedging".

In Russia, the most popular futures is the RTS index.

You can buy futures from any Forex broker or on the MICEX currency section. At the same time, free “leverage” is provided, which allows you to play for decent money, even with a small capital. But it is worth remembering the risks of using your shoulder.

Best Forex brokers:

The best brokers for MICEX (FOTS section):

5. Futures or Stocks - what to trade on

What to choose for trading: futures or stocks? Each of them has its own characteristics.

For example, by purchasing a share you can receive annual dividends (as a rule, these are small amounts, but nevertheless, there is no extra money). Plus, you can hold shares for as long as you like and act as a long-term investor and still receive at least a small percentage of profit every year.

Futures are a more speculative market and holding them for more than a few months hardly makes sense. But they are more disciplined for the trader, since here you have to think about a shorter period of play.

Commissions for transactions on futures are about 30 times lower than on stocks, and plus, leverage is issued free of charge, unlike the stock market (here a loan will cost 14-22% per annum). So for lovers of scalping and intraday trading, they are perfect.

In the stock market, you cannot short (go short) some stocks. Futures do not have this problem. You can buy both long and short all assets.

6. Futures on the Russian market

There are three main sections on the MICEX exchange where there are futures

1. Stock
   • Shares (only the most liquid)
   • Indices (RTS, MICEX, BRICS countries)
   • Volatility of the MICEX stock market
2. Monetary
   • Currency pairs (ruble, dollar, euro, pound sterling, Japanese yen, etc.)
   • Interest rates
   • OFZ basket
   • RF-30 Eurobond basket
3. Commodity
   • Raw sugar
   • Precious metals (gold, silver, platinum, palladium)
   • Oil
   • Average price of electricity

The name of the futures contract has the format TICK-MM-YY, where

• TICK - ticker of the underlying asset
• MM - month of futures execution
• YY - futures execution year

For example, SBER-11.18 is a futures contract on Sberbank shares with execution in November 2018.

There is also an abbreviated futures name in the format CC M Y, where

• СС - short code of the underlying asset of two characters
• M - letter designation of the month of execution
• Y - last digit of the year of execution

For example, SBER-11.18 - futures for Sberbank shares in the abbreviated name looks like this - SBX5.

The following letter designations for months are accepted on the MICEX:

• F - January
• G - February
• H - March
• J - April
• K - May
• M - June
• N - July
• Q - August
• U - September
• V - October
• X - November
• Z - December

Related posts:

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Good afternoon, trading blog readers. The word futures is an agreement or contract between a buyer and a seller that obliges both to buy or sell some asset at a specific time in the future at the current price.

These contracts are freely traded on exchanges and are traded with a fairly large leverage(10:1 or 20:1), through which they are very popular among experienced speculators. After reading this page to the end, you will understand the main idea that I want to convey to you: futures are a fairly powerful and profitable financial instrument for trading, but they carry great risks for a novice trader due to their trading features.

Imagine a baker who makes beautiful and delicious products from wheat flour. His business is stable, orders are placed months in advance. He buys wheat from the nearest farmer at an adequate price. What will happen to the business of a baker who works on pre-orders if next year the harvest is bad and the price of wheat rises? In simple words, he will suffer losses.

For these reasons, the baker comes to the farmer and offers to conclude an agreement for the purchase of 10 tons of wheat at the current price next year for a small advance payment (warranty coverage) 5-10% of the total transaction value. The first undertakes to buy and the second to sell. The farmer agrees, since another farm has opened nearby, which gives him considerable competition. Who knows if he will be able to sell grain next year?

This agreement is a futures contract. No matter how things turn out next year, the deal must be completed. Both sides are on equal terms. If the wheat harvest is poor, the price will rise. The baker will be pleased because he buys at the old price, and the farmer, although he will not be offended, will be disappointed.

If the wheat harvest is excellent, the price will fall. The farmer is happy that he can sell his goods at a higher price, and the baker is upset, although his business continues to operate steadily.

Let's summarize briefly. Futures are:

• A tool that puts the buyer and seller in equal conditions;
• Commitment buy Sell underlying asset, which in our example is wheat. The underlying assets can be stock indices, goods and raw materials, currency, precious metals and other assets;
• Agreement or just a piece of paper that stands 5-10% of the entire transaction value. The transaction itself is completed 100% only in the future after the expiration of the contract.

Why do we need futures?

Firstly, to limit risks. In the example above, both the farmer and the baker simply wanted to insure their businesses against unexpected price changes. That is, futures are one of the hedging methods. You buy it to hedge against a rise in the price of the underlying asset and sell it if you need to limit losses when the price of the underlying asset falls.

Secondly, futures are an ideal tool for speculation. On a futures exchange, a trader does not wait for the contract to expire to receive the underlying asset. He actively buys and sells futures for only 5-10% of the value of the entire transaction. This is a prime example margin trading, when you get leverage from 10 to 1 to 20 to 1.

What are the risks of futures trading?

Futures are a purely speculative instrument. It’s just that no one can predict what the price of the underlying asset will be in a year or a few months. For example, the amount of wheat on market shelves depends on the natural conditions that affect the harvest, storage conditions and delivery options (transport, roads). Will you be able to predict all this and place your bet? Of course not.

To help you understand this, compare futures with share? If a business shows an increase in profits year after year, then the price of its shares will continue to rise in the future. Investors like Buffett know this well and make money this way.

Another feature of futures is margin trading. You are getting leverage, which makes it possible to open positions that are 10 or even 20 times larger than your trading account. Thus, if, for example, a $1 change in the stock price corresponds to a profit or loss of $1 (per 1 lot), then a $1 change in the futures price corresponds to a profit or loss of $10 or $20 (per contract).