Introduction to Futures
Let’s learn more about Introduction to Futures. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. This is different from forward contracts because the futures contracts are standardized and exchange-traded. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction.
Contract price of futures contract is transparent because the details are available on the principal trading screen of the exchange. In futures, the valuation of Mark-to-Mark position is evaluate as per the official closing price on daily basis and MTM margin requirement exists. Futures contract is more liquid as it is safely traded on the exchange.
In futures contracts, the clearing-house is the counter party to every transaction. Therefore, counter party risk is almost nil. A regulatory authority and the exchange regulate the futures contracts. These contracts are generally cash settled but preference of physical settlement is given to the trading parties. Delivery tendered in case of futures contract should be of standard quantity and quality as specified by the exchange.
To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of the contract. The main standardized items in a futures contract are:
- Quantity of the underlying
- Quality of the underlying
- The date and the month of delivery
- The units of price quotation and minimum price change
- Delivery center
