Mar 7 2010
The futures and the options
Modern futures markets derive from Japanese rise future contracts originated in the middle of XVIII century. In USA that recently has the most futures deals futures grain contracts received their demand in the middle of XIX century in Chicago. Presently, the derivative financial instruments trading (including futures and options) is the world leader financial industry by volume as contracts for variety of goods, financial instruments, currencies and indexes are being traded. And the specter of available markets increases year by year.
The futures contract is a standard agreement reached by two parties obliging one party to sell and the other party to buy the specified amount of goods at specified price by specified date in future. By “good” we presume the wide range of actives: currencies, bonds, stock indexes of largest world economies (S&P, Dow Jones, FTSE, DAX) and goods (oil, gas), as well as metals (precious and industrial ones) and agricultural derivatives (grain, soy, coffee, wood, etc.)
Futures contracts can be delivery and non-delivery. You can close the delivery contract either by delivering goods or by signing the opposite contract (off-set deal). It means that closing of non-delivery contract is possible only with signing an opposite deal. The market cost of futures contract directly depends on current supply and demand for when you have more buyers than sellers the price would increase introducing new sellers to the market until the amount of buyers and sellers is balanced again.
The option for futures contract unlike the contract itself offers not an obligation but the right to buy or sell the futures at the execution price before the preset date (or at the date) with paying the certain premium for that.
All participants of derivatives market may be split up into speculators and hedgers.
The speculators try to profit from the changes of goods’ prices in time as the nature of futures trading (the starting and supporting margins concept) provides the possibility to work (and control) with big capitals having relatively small deposits on brokers’ accounts. For example, having $3000 deposit you are able to buy/sell 125000 Euro, gold for $50000 and oil for $45000. Still with futures you are able to profit with rising and decreasing markets as well and it attracts lots of risk investments. The derivative markets are the ones of the most liquid markets in the world decreasing a trader’s transaction costs and providing easily opened/closed positions.
The hedgers, unlike the speculators, use financial derivatives markets to minimize the risks of their base activities. Hedging presumes the knowledge of futures positions opposite to ones on the spot-market, i.e. the air company to control the fuel prices rise should hold a long position on it. Presently, the hedging risk management is widely used by small enterprises and international corporations.
Futures and options trading advantages
-Variety of tools for many markets available from single trading account
-Marginal trading
-Deals clearness and legal support
Besides the futures and options markets may be more attractive for traders because of their high volatility.
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