Which specification has FUTURES Contracts

(1) A futures contract is a standardized commitment between two partners, a seller and a buyer to sell or buy an asset (commodities, shares, currencies, gold, etc.) at a price set at the time the transaction is concluded and the performance of the contract at a future date, called maturity.

The fact that these contracts are considered to be very flexible and attractive products is the standardization of its main clauses: the amount, the maturity, the way of execution at maturity. The only non-standard clause is the price that is established by intersecting the demand with the offer on the electronic trading platform specific to that stock market.

The price of the futures contract is set on the stock exchange through the specific negotiation and contracting procedure of this organized market. This price is the expression of the demand-to-supply ratio for each standardized contract (the same basic asset, the same maturity) and it varies daily, depending on market conditions. As a result, the value of the contract (given by the product between the unit price and the transaction unit) is no longer fixed but variable. Hence, one of the defining features of the futures contract is that its value is daily updated or "marked to market" so that the losses of one of the contracting parties are transferred as income to the other party.

In a futures contract, the contract terms are standardized with respect to the nature of the underlying asset (a commodity of a certain quality, a given currency, an action, etc.) and the contracted quantity, also called a transaction unit. All futures contracts on the same standardized asset form a type of futures contract.Each futures contract has a certain term of execution, one month in which liquidation is to take place. Months of delivery are pre-set by the regulations of the respective exchange, and contracts on a certain asset with the same maturity form a kind of futures contract on that asset. These contracts are mutually substitutable because their object is a qualitatively homogeneous asset, defined in a unitary manner in quantitative terms, all having the same maturity.

Depending on the nature of the underlying, the completion of futures contracts can be done by delivering / receiving the underlying asset or paying / collecting a sum of money as a difference between the exercise price and the market price of the contract at the time the position is cleared.

Most futures are finalized by clearing (closing the initial position through a counter-transaction). If the contract is to be concluded by the physical delivery of the underlying, the respective operator expresses this option with a certain number of days before the due date.

Futures trading means taking a position on the price level of a particular asset at a later date. An open position is a futures contract that has not yet been cleared through a counter-transaction. The number of open positions is calculated separately for each type of contract and maturity. By buying or selling futures, the time keeper shall only record in its open account to the intermediary the price differences resulting from such successive operations.

The futures market is a derivative market and as a result futures are not materialized in currencies, shares, commodities, etc. (the trader does not own the underlying asset).

The person holding a futures contract is not obliged to keep it until maturity, but may liquidate it beforehand by a reverse transaction to the original one, and if the price is favorable it will obtain a profit.

(2)Standardized futures contract specifications:

- the size of the price fluctuation step (tick) the minimum price fluctuation that restricts the price movement on a trading day

- daily oscillation limit daily trading price oscillation versus a reference price (closing price of the previous session, opening price, price of resumption of transactions, etc.)

- the transaction unit the quantity by which the value of the contract is determined

- quote price per transaction unit (usually similar to the underlying asset)

- maturity is fixed (specified as a single maturity or as several maturity days)

- liquidation of the futures position actual delivery (surrender / receipt of the underlying asset) or clearing (payment / receipt of the value of the loss / gain of the contract)

Securing trades and settlements on the futures market is done through the counterparty counterparty on the relevant market by means of the collateral (margins) that it collects from each participant.

The initiation of an order to sell / buy a futures contract requires the seller / buyer to set up a collateral (margin) that is collected by the intermediary and then transferring them to the clearing house. The level of these margins is set separately for each contract and may be changed periodically according to market volatility, the value of the futures contract, the daily price development of the underlying asset or the maximum price fluctuation limits.

Carrying out the transactions involves setting the initial margin (for initiation of the operation) and the margin for maintaining for as long as there are open positions in the market. The level of the two margins may be the same or a differentiated level can be established for each margin.

Guarantees are constituted by all participants and remain blocked as long as positions on futures are open. When the positions are cleared, the margin is released and can be withdrawn.

It should be noted that although it is the clearing body that keeps track of the margins (guarantees) submitted by the participants, the participants' contact with the body is not directly achieved, but with the help of the intermediary with which each participant works.

The circuit involved in the margin deposit is:  

(3)Past features, plus the high degree of standardization (making them as easy as shares) and the correlated movement between underlying asset and derivative market prices have attracted many speculators in the futures market. A speculator can be defined as an investor who wants to obtain a profit and a higher return. If, from the point of view of volatility, the two markets generate about the same results, instead of the required investment, the futures market is in the net advantage.

If we add the advantage of speculation on falling prices and very low trading fees, it can be said that the futures market serves very well the interests of speculators.

According to the regulations of each stock market, the margin requirement may be a certain percentage of the underlying assets (shares) of the futures contracts. Shares lodged as margin must exist in the client's account at the intermediary. In order for a client to be able to use shares instead of cash as a margin, he must hold his own shares in favor of the intermediary.

The fact that the shares can be used to cover the margin on the futures market is an extremely important asset for hedge investors, in which case they significantly reduce the costs of financing open positions.

The initiation of a sale / purchase futures transaction can easily be made when there are price offers on the respective contract. However, the problem that may arise for the investor is determined by the desire to clear the position and exit from the market. If on a liquid market this is not a problem, instead of the less traded contracts, the risk of liquidating a position at a very bad price or not finding a counterpart may affect operators, especially speculators.

In order to ensure a minimum liquidity on less traded contracts, a special category of market makers operates under the scholarships. In order to sustain market liquidity, these intermediaries provide purchase and sale quotations during the trading session on certain contracts and maturities. Thus, investors can open positions on these contracts safely.

Derivative trading differs substantially from the trading of classical instruments in the spot market (shares, bonds or other securities). By their own construction, derivatives benefit from gains and losses (leverage). Also, trading on the futures market is much lower than in the spot market, which makes it easier to open and close positions on this market, especially for intra-day transactions. All these are net benefits to investors, but trading in derivatives also involves taking risks.

Trading on the futures market is generally aimed at tilting operators to take a high risk because substantial amounts of money can be lost in very short periods of time. This is mainly due to the leverage effect that enables a small amount of money to access underlying assets that are several times more likely to bring multiplied losses if the course is not the predicted course.

According to the characteristics of derivatives, the effect of unfavorable market price movements results in the immediate recording of losses. Gains or losses are credited or debited from the account in real time. If market movements have the effect of reducing the value of open positions on derivatives, due to the margin call, there is a need to supplement the funds in the margin account. If there is not enough liquidity to cover in the margin account In order to liquidate its holdings, the operator on the futures markets has the following possibilities:

- initiate in the market prior to the maturity of the contract, an inverse position (if it acted as buyer will sell and vice versa), but the same quantity as in the original transaction

- wait for the moment when the clearing body on that market (being a counterparty to each purchase or sale of futures) will automatically liquidate all open positions.

The specific features of a futures contract are:

- the subject matter of the contract is known as the "asset" (securities, commodities, currencies or any financial asset admitted by the stock exchange regulation)

- the elements of the contract are standardized

- the margin account is used by the intermediary and the clearing regulator

- the contract price is updated daily on the stock market by marking the market

- the results of daily futures contract pricing are the profit of a party, ie the loss for its counterpart, results that are taken into account in the margins account

- the contract may be terminated at any time during its lifetime

The futures contract is a firm term agreement and for which a secondary trading market is created. Operators' forecasts are different in terms of market price evolution:

- the buyer (long position) anticipates a further rise in prices

- the seller (short position) foresees a fall in prices in the future

Depending on the purpose of initiating futures transactions, the participants may be:

- hedge funds invest in futures contracts to protect themselves against the loss that may occur as a result of the unfavorable fluctuation in the market rate of a given underlying asset

- speculators aim to obtain gains from the market price fluctuation with assumed increased risks if the market evolution is inverse to the expected one

- arbitrators aim to obtain lower earnings than speculators from the price difference recorded on different markets or at different maturities

By the futures contract, the buyer of the contract agrees to pay, and the seller of the contract will collect the negotiated price for the respective asset. The exchange is the one that ensures the conditions of meeting the demand with the offer, gives the possibility to negotiate between the buyer and the seller and establishes the standardized clauses of the contract and the rules of the negotiation of the price. (4) When a position on the futures market opens at a certain price, the margin of the investor opened at his broker is blocked the corresponding amount as margin for the traded contract. From this moment on, depending on the movements in the price of the respective contract, the investor starts to record profit or loss. If he buys and then the price increases, he will make a profit. If the price drops, he will lose. As long as the position remains open, the profit or loss recorded as a result of price fluctuations are virtual and are continually moving according to the fluctuations of the futures price. When the position is closed, they become effective.

The process by which profits / losses associated with open market positions are determined is marketed at the market. In order to prepare a general statement of all margin accounts in the futures market, the market price is determined by the regulations of each stock exchange for each contract and maturity. Depending on this price, it is determined the profit or loss realized on each account on that day. This price is valid only for that day, the next day a new price is set.

Following the marking of open positions, an investor's account may indicate a profit or loss. If the profit can be withdrawn, the loss must be covered every day so that at the beginning of each trading session the amount in the investor's account is at least at the level established by the regulations of the respective market. If the amount in the margin account falls below the margin, it is in the margin call position. In this case, the investor is required to complete the amount in the account up to the margin level. The margin call is issued at the end of the trading session and the amount must be completed by the next day (at the opening of the trading session).

From the margin call, the investor may be in one of the following ways:

- feeds the account within the specified amount by the requested amount and maintains its positions open on the respective market

- closes a number of open positions in such a way that the amount released as a result of this operation covers the required margin for the remainder of the open positions

- does not do anything and in this case the intermediary will automatically liquidate a number of open positions so that the amount released will cover the required margin for the remainder of the open positions.

In the case of a margin call not covered in time, all positions in that account will not be forced to close, but only as many as necessary to remove the call.

Trading futures brings a number of advantages.

Only a fraction of their value is paid on the futures market (usually 10-20%) because the underlying assets are not traded, but only their price - the principle of margin purchases.

On the futures market, underlying assets can be sold without buying in advance - the principle of short sales.

Because derivatives are dematerialized contracts and are presented as payment commitments at a certain price and a certain maturity, an operation in this market can begin directly through a sale.

As a result, the futures market can make profits both on a growing market and on a declining market. This is especially useful for those holding equity portfolios and wanting to preserve their value in declining periods, as they can sell the equivalent amount of shares on the futures market, and any downside on the underlying asset market will be offset by the profit generated in following the sale on the futures market (hedging).

In order to obtain a profit on the futures market, it is necessary that the price evolution is correctly estimated and that the corresponding position is initiated (sale if there is a decrease or purchase if an increase is foreseen). The required minimum margin or the amount in the account is not filled in, the positions may be forced to be liquidated by the intermediary and a possible return of the price will no longer be useful.

Under certain market conditions, it may be difficult or impossible to liquidate a position. The risk that may arise is that the position can not be liquidated (ie, the impossibility of marking profits or preventing loss) or if the position closes, this can be done at less favorable prices.

All derivative transactions involve risk and there is no trading strategy to eliminate it completely. Trading in financial derivatives requires knowledge of both the derivatives market and the spot market of the underlying asset.