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Futures market. General concepts and some subtleties


Futures concept

Futures or the so-called futures contracts are the main of the most common instruments in the field of financial investments. In this case, this terminology means that the value of the contract is related to the price set for a particular product. The goods can be precious metals and petroleum products, as well as crops or even livestock. The processes associated with futures are not aimed at buying the underlying asset, but at earning from the increase in the value of the commodity in the future.

The whole point of futures trading is based on the terms of the future delivery of the goods. This term got its name due to this fact. Translated from English, futures means "future".

By purchasing a futures contract, you agree to pay the price for the goods that is set today. But you will receive the product itself tomorrow. This factor is the main difference between the futures market and the usual cash market, where goods are paid at market value at the time of purchase.

For a better understanding of the operation of a financial instrument, it is necessary to mentally draw up the following diagram. There is a certain farm whose main activity is growing tomatoes. In order to start sowing their fields, farmers need to make some financial investments, buy seeds and fertilizers, as well as hire personnel and purchase special equipment. Since this is a rather expensive undertaking, the owners of the farm have no certainty that the harvested crop will cover all the costs associated with growing it.

And it is futures contracts that allow the farmer to get a guarantee to cover their costs. By selling futures contracts through the exchange, the manufacturer will be able to sell his goods at a fixed price without worrying that prices will drop significantly tomorrow. When harvesting, not only futures contracts are covered, but all losses are compensated

Symbols and decoding of futures contract codes

Each concluded contract is marked with a special code that makes it possible to understand what is the subject of sale and purchase, in what currency the transaction is carried out and in what month and year the contract expires and it is necessary to provide the goods to the buyer.

Deciphering futures is actually not as difficult as it might seem at first glance.

Suppose you have a cocoa contract, the code is "CCZ2". Here, the first 2 characters indicate that the subject of the contract is cocoa.

The third character is usually the month when the contract will end. In this case, it's December. The number at the end indicates the year the contract ended.
All the meanings of the used letter codes can be found on the Internet, but the main part of them will be given below.

The letters of the Latin alphabet from F to Z are used to indicate the month.

Separately, the currency in which the contract is concluded can be indicated. 6E - euro, DX - US dollar, 6R - Russian ruble or any other currency freely convertible on the world market.

There are codes for the designation of raw materials (energy, grain products, metals) and finished goods.

These indices are the most common, but if you want to know more, we recommend that you search for the necessary symbols yourself.

Types of futures and futures contracts

The types of futures can be as follows:

Futures with delivery and futures where delivery is not expected.

Commodity and financial futures.

Contracts that provide for the possibility of delivery are used in the sector of the real economy. In this direction, contracts are concluded, where the price of the goods is set in advance. This fact serves as some guarantee of sales. Such futures contracts are very common in the farming environment where a contract is made for the price of a commodity next season. As described above, this contract not only facilitates the procurement of various materials, raw materials and the hiring of workers, but also insures both parties against changes that will occur in the future in the market.

Another type of futures contracts is the ability to profit from an increase in the base price of a commodity, without making the purchase itself.

For example, having received a futures contract for oil products at 70 euros per barrel, the holder of such a contract will receive a profit of 10 euros per barrel, provided that the price rises to 80 euros. But there is a risk of losing your investment if the price drops below the rate at which the product was purchased.

When concluding such goods, the contract holder does not need to be involved in the transportation of oil and its storage. In order to perform various actions with such goods, an ordinary personal computer with the ability to access the Internet is enough.

As you can see, everything is quite simple here, all that remains is to clarify small details. Such details include types of futures contracts, which are also divided into two types.

Type one - commodity futures. As the name implies, these contracts include all types of goods. It can be various agricultural products - seeds, livestock, grain and cereals, as well as lumber and even timber. In addition, commodity futures include various metals - palladium, gold , silver, copper and many others. They also include various raw materials obtained from oil - gasoline, gas or other types of fuels and lubricants.

The second type is a type of futures contracts related to finance, they include various index futures, stock and currency futures, as well as interest rates. Physical goods shipments are not required here. The parties settle in cash.