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| Futures
Trading |
In
futures trading, there is usually a contract, which
is essentially an agreement between two parties to buy
or sell an underlying asset at a certain time in the
future at a certain price. A futures contract usually
has a standardized date and month of delivery, quantity
and price.
Futures trading is usually carried out on a futures
exchange. Futures differ from forwards in terms of margin
and delivery requirements. In order to facilitate liquidity
in futures trading, the futures exchange specifies certain
standard features of the contract.
In futures trading, a futures contract may be offset
prior to maturity by entering into an equal and opposite
transaction. More than 99% of transactions in the futures
trading are usually offset in this manner. The date
specified in the options/futures contract is known as
the expiration date.
The Futures price is the price at which the futures
contract trades in the futures market. The expiration
date for all contracts in futures trading is usually
the last Thursday of the respective month. Three series
of futures contracts are available and have one-month,
two-months and three-months expiry cycles. On the Friday
following the last Thursday, a new contract having a
three-month expiry is introduced for trading.
The most important role that futures trading performs
is in aiding the process of proper price discovery.
Since several different types of players are engaged
in trading the futures.
Apart from aiding price discovery, futures contracts
also aid in the hedging of price risk in a commodity.
Futures contracts are useful for the producer because
he can get an idea of the price likely to prevail and
thereby help them quote a realistic price and hedge
risk.
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