Basic Cognition and 3 Concept of Futures



16 2 月

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What are futures?

Futures contract, referred to as futures, is a way of trading across time. By signing the contract, the buyer and the seller agree to deliver the specified quantity of spot goods according to the specified time, price and other transaction conditions. Usually, futures are concentrated in futures exchanges and traded in standardized contracts, but some futures contracts can also be traded through counter transactions, called over-the-counter contracts.

Futures are a kind of derivative instruments. According to the type of spot subject matter, futures can be divided into two categories: commodity futures and financial futures.

Among the futures traders, arbitrageurs lock in profits and costs by buying and selling futures, and reduce the risk of price fluctuations brought about by time.

 Speculators take more risks through futures trading, looking for opportunities to make profits in price fluctuations.

Many futures markets have developed from forward contracts, which refer to one-to-one contracts signed individually over time, and the transaction details are agreed upon by the buyer and the seller.

Futures Margin Calculation

Futures is a margin trading system. When investing in futures, buyers and sellers must pay a certain percentage of the total value of the contract, which is called futures margin. The purpose of futures margin is to serve as a guarantee for future performance or as a principal for repaying losses. At the same time, it also allows operators to control a large number of commodity positions with a small amount of funds. It also makes futures a high-risk "small to big" through the principle of leverage. investment vehicle. There are two types of margin: original margin and maintenance margin:

(1)Initial Margin
It is the margin that investors must have when they enter the market. The amount depends on the different commodities. There are different original margins (generally about 5% to 15% of the total contract value), and the margin will also change with the change of the contract price.

 (2)Maintenance Margin
The maintenance margin is usually 70% to 80% of the original margin. If the balance in the customer's margin account after daily calculation of floating profit and loss is lower than the original margin, the futures broker will notify the customer to pay the margin (Margin Call) to the original margin level, the client is obliged to make up the difference within the specified time, otherwise the broker has the right to close the futures position on behalf of the client.

Types of futures

Futures Market Description
Since the evolution of trading, it has become more and more prosperous, and commodity contracts have become more and more diverse. Futures contracts can be roughly divided into two categories: commodity futures and financial futures. The common futures contracts in the market are roughly as follows:

A、commodity futures. This type of contract is mainly based on traditional bulk materials, and it is the earliest contract commodity developed in the futures market.

  1. Agricultural futures: such as grains, soybeans, cotton, pigs, etc. The main trading markets are the Chicago Board of Trade (CBOT) and the Tokyo Grain Exchange (TGE).
  2. Metal futures: such as gold and silver for precious metals, copper and aluminum for industrial metals, etc. The main trading markets are the New York Mercantile Exchange (COMEX), the London Metal Exchange (LME) and so on.
  3. Energy futures: This type of contract is mainly oil, and there are also petroleum products such as fuel oil and gasoline. The main trading markets are the New York Mercantile Exchange (NYMEX), the British International Petroleum Exchange (IPE), etc.
  4. Soft futures: There are two types of futures contracts, coffee and cocoa, which are special planted commodities. The main trading markets are coffee, sugar and cocoa exchange (CSCE) and London commodity exchange (LCE).

B、financial futures. Since the collapse of the Bretton Woods Conference in the 1970s, the huge fluctuations in international exchange rates and interest rates have prompted the birth of foreign exchange futures contracts. Since then, financial futures have developed rapidly and have become the largest contract in futures trading. The main financial futures contracts are as follows:

  1. Foreign exchange futures contract: The foreign exchange futures contract is similar to the bank's far exchange market, except that the foreign exchange futures has a standard contract and is conducted in a centralized trading manner. The more active foreign exchange futures contracts include British pound, Canadian dollar, euro, Japanese yen, German mark, Swiss franc and so on.
  2. Short-term interest rate futures contracts: the most common are Eurodollars and US Treasury bills.
  3. Long-term interest rate futures contracts: Long-term interest rate futures are based on U.S. medium-term Treasury bonds (T-Note) and long-term Treasury bonds (T-Bond).
  4. Stock price index futures contract: The stock price index futures contract does not require the actual delivery of the stocks included in the index, and is settled in cash on the maturity date, and the amount is determined according to the value of the stock price index in the spot market. Popular commodities include S&P 500, Nikkei 225 and Morgan Taiwan Index, etc.

At present, the world's major financial commodity exchanges are Chicago Mercantile Exchange (CME), Singapore International Monetary Exchange (SIMEX), London International Financial Futures Exchange (LIFFE), etc.

Basic Cognition and 3 Concept of Futures

Basic Cognition and 3 Concept of Futures

Questions and Answers about Futures:

1. What is a futures contract?

A futures contract is an agreement to buy or sell a specific quantity of an asset at a predetermined price and time in the future. It's like a promise to trade at a set price later, regardless of the current market value.

2. What are the different types of futures contracts?

There are two main types:

  • Commodity futures: Based on physical commodities like agricultural products (grains, soybeans), metals (gold, copper), energy sources (oil), and softer commodities (coffee, cocoa).
  • Financial futures: Based on financial instruments like foreign currencies, interest rates, and stock market indices.

3. Why do people trade futures?

People trade futures for various reasons:

  • Hedging: Lock in future prices and reduce risk from price fluctuations.
  • Speculation: Profit from price movements by buying low and selling high.
  • Arbitrage: Exploit price differences between different markets.

4. What is margin in futures trading?

Futures use a margin system, where traders only need to deposit a portion of the contract value (e.g., 5-15%). This leverage amplifies both profits and losses.

  • Initial margin: Required to enter a position.
  • Maintenance margin: Minimum level to maintain the position, otherwise a margin call occurs.

5. What are the risks of futures trading?

Futures are high-risk due to leverage, price volatility, and margin calls. Losses can exceed your initial investment.

6. Where are futures traded?

Futures are traded on specialized exchanges like the Chicago Mercantile Exchange (CME) and the Singapore International Monetary Exchange (SIMEX).

7. What are some examples of popular futures contracts?

  • Commodity: Crude oil, gold, corn, soybeans.
  • Financial: Eurodollars, Treasury bonds, S&P 500 index.

8. What should I know before trading futures?

Carefully understand the risks, research the specific contract, start with small positions, and consider seeking professional advice before investing.

This summary provides a basic understanding of futures trading. Remember, it's crucial to research and learn more before making any investment decisions.




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