In simple words: what is a futures? Futures (futures contracts) What are stock futures

Futures (futures contracts, from English futures) is a derivative security (), which is an agreement establishing the conditions for the purchase or sale of a standard quantity of a certain asset at a certain date in the future, at a price established at the time of the transaction.

There is a rule according to which at least two business days must pass between the determination of the terms of a transaction and its execution, otherwise the transaction is considered immediate.

Why are futures contracts needed?

Futures have three general purposes.:

• The most important purpose of futures in general is to determine the price of an instrument.

The application value for market players can be one of two (or a combination):

• insurance against financial risks, i.e. (mainly dealt with by real suppliers or consumers of the tool)
• speculation for financial gain (done by experienced traders and investors)

What parameters does a futures have?

Any futures has two main parameters:

• execution date - i.e. a specific date on which the purchase and sale transaction must be completed
• instrument - i.e. the subject of the contract, be it goods, raw materials, securities or currency (in the case of currency, such a contract is called a forward contract)

Additionally, there are additional options:

• the exchange on which the futures are sold;
• size and unit of measurement (for example, 100 barrels);
• contract quotation unit (for example, US dollars per barrel);
• the amount of margin (i.e. the amount that is deposited when signing a future and is held to cover a loss, if any).

What is special about futures?

The buyer of a futures contract (futures) accepts an obligation to buy the asset specified in the contract at the agreed time. The seller of a futures contract undertakes to sell the asset within the agreed period.

The peculiarity of a futures contract is that when making this transaction, we are talking about a standard quantity of goods (called a contract or lot) and a specific period (called the delivery day). After the expiration of the delivery date specified by the futures contract, the next one is set, and trading begins on the new contract.

Due to the fact that the price of a futures contract is set at the time the transaction is concluded and does not change until the day the contract is executed (regardless of what the prices of the underlying asset are), futures are often used by sellers to insure their own risks when trading various instruments and goods, which is called hedging.

Futures trading

Futures contracts are especially popular among traders who profit from fluctuations in exchange prices, because have a number of advantages over regular stock trading (namely, low commissions, increased leverage, the procedure for calculating exchange rate differences, etc.). The most liquid contract on the Russian derivatives market is the futures contract.

Futures Exchange

In Russia, the derivatives market (Forts) is represented by the Moscow Exchange. The derivatives exchange trades futures on stocks, bonds, commodities, energy, currency pairs and indices.

The most liquid instruments are:

Stock futures

Index futures

• MIX (Moscow Exchange)
• RTS (Russian Trading System)

Commodity futures

Futures on currency pairs

Futures are very liquid, volatile and quite risky, so new investors and traders should not deal with them without proper preparation.

Useful articles on the topic

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Surely you have already noticed on various financial websites, where there are currency quotes and economic news, a special section “Futures”. At the same time, there are a large number of their varieties. In this article we will talk about what Futures are, why they are needed and what they are.

1. What is Futures

Futures(from the English "futures" - future) - this is one of the liquid financial instruments that allows you to buy/sell goods in the future at a pre-agreed price today

For example, if you buy December futures in the summer, you will receive delivery of this product in December at the price you paid in the summer. For example, these could be stocks, currency, goods. The moment of completion of the contract is called expiration.

They have become widespread since the 1980s. Nowadays, Futures are just one of the tools for speculation for many traders.

The main purpose of futures is to hedge risks

For example, you own a large block of shares in a company. There is a decline in the stock market and you have a desire to get rid of them. But selling such a large volume in a short period of time is problematic, since it can cause a collapse. Therefore, you can go to the futures market and open a bearish position.

Also, a similar scheme is used during periods of uncertainty. For example, there are some financial risks. They may be associated with elections in the country, with some uncertainties. Instead of selling all your assets, you can open opposing positions in the futures market. Thereby protecting your investment portfolio from losses. If the futures fall, you will make money on it, but you will lose on the stock. Likewise, if stocks rise, you will make money on this, but will lose on futures. It's like you're maintaining the status quo.

Note 1

In textbooks you can see another name - “futures contract”. In fact, this is the same thing, so you can say it as you prefer.

Note 2

A forward is very similar in definition to a futures, but is a one-time transaction between a seller and a buyer (a private arrangement). Such a transaction is carried out outside the exchange.

Any futures must have an expiration date, its volume (contract size) and the following parameters:

• name of the contract
• code name (abbreviation)
• type of contract (settlement/delivery)
• contract size - the amount of the underlying asset per contract
• terms of the contract
• minimum price change
• minimum step cost

No one issues futures like stocks or bonds. They are an obligation between the buyer and the seller (i.e., in fact, traders on the exchange themselves create them).

2. Types of futures

Futures are divided into two types

1. Calculated
2. Delivery

With the first ones everything is simpler, in that nothing will be supplied. If they are not sold before execution, the transaction will be closed at the market price on the last day of trading. The difference between the opening and closing prices will be either a profit or a loss. Most Futures are settlement.

The second type of futures is deliverable. Even from the name it is clear that at the end of time they will be delivered in the form of a real purchase. For example, it could be stocks or currency.

Essentially, Futures are an ordinary exchange instrument that can be sold at any time. It is not necessary to wait for its completion date. Most traders strive to simply earn money, and not actually buy something with delivery.

For a trader, futures on indices and stocks are of greatest interest. Large companies are interested in reducing their risks (hedge), especially in commodity supplies, so they are one of the main players in this market.

3. Why are Futures needed?

You may have a logical question: why are Futures needed when there are base prices. The history of their appearance goes back to 1900, when grain was sold.

To insure against strong fluctuations in the cost of goods, the price of future products was set in winter. As a result, regardless of the yield, the seller had the opportunity to buy at the average price, and the buyer had the opportunity to sell. This is a kind of guarantee that one will have something to eat, the other will have money.

Futures are also needed to predict the future price, or more precisely, what the trading participants expect it to be. The following definitions exist:

1. Contango - an asset is trading at a lower price than the futures price
2. Backwardation - an asset is trading at a higher price than the futures price
3. Basis is the difference between the value of the asset and the futures

4. Futures trading - how and where to buy

When purchasing futures on the Moscow Exchange, you must deposit your own funds for approximately 1/7 of the purchase price. This part is called "guarantee security". Abroad, this part is called margin (in English "margin" - leverage) and can be a much smaller value (on average 1/100 - 1/500).

Entering into a supply contract is called "hedging".

In Russia, the most popular futures is the RTS index.

You can buy futures from any Forex broker or on the MICEX currency section. At the same time, free “leverage” is provided, which allows you to play for decent money, even with a small capital. But it is worth remembering the risks of using your shoulder.

Best Forex brokers:

The best brokers for MICEX (FOTS section):

5. Futures or Stocks - what to trade on

What to choose for trading: futures or stocks? Each of them has its own characteristics.

For example, by purchasing a share you can receive annual dividends (as a rule, these are small amounts, but nevertheless, there is no extra money). Plus, you can hold shares for as long as you like and act as a long-term investor and still receive at least a small percentage of profit every year.

Futures are a more speculative market and holding them for more than a few months hardly makes sense. But they are more disciplined for the trader, since here you have to think about a shorter period of play.

Commissions for transactions on futures are about 30 times lower than on stocks, and plus, leverage is issued free of charge, unlike the stock market (here a loan will cost 14-22% per annum). So for lovers of scalping and intraday trading, they are perfect.

In the stock market, you cannot short (go short) some stocks. Futures do not have this problem. You can buy both long and short all assets.

6. Futures on the Russian market

There are three main sections on the MICEX exchange where there are futures

1. Stock
   • Shares (only the most liquid)
   • Indices (RTS, MICEX, BRICS countries)
   • Volatility of the MICEX stock market
2. Monetary
   • Currency pairs (ruble, dollar, euro, pound sterling, Japanese yen, etc.)
   • Interest rates
   • OFZ basket
   • RF-30 Eurobond basket
3. Commodity
   • Raw sugar
   • Precious metals (gold, silver, platinum, palladium)
   • Oil
   • Average price of electricity

The name of the futures contract has the format TICK-MM-YY, where

• TICK - ticker of the underlying asset
• MM - month of futures execution
• YY - futures execution year

For example, SBER-11.18 is a futures contract on Sberbank shares with execution in November 2018.

There is also an abbreviated futures name in the format CC M Y, where

• СС - short code of the underlying asset of two characters
• M - letter designation of the month of execution
• Y - last digit of the year of execution

For example, SBER-11.18 - futures for Sberbank shares in the abbreviated name looks like this - SBX5.

The following letter designations for months are accepted on the MICEX:

• F - January
• G - February
• H - March
• J - April
• K - May
• M - June
• N - July
• Q - August
• U - September
• V - October
• X - November
• Z - December

Related posts:

Today on the Econ Dude blog we will talk briefly about futures contracts (futures) and I will give an example of how they work on the stock exchange and when trading.

In fact, most people do not need to know this, since the topic is very specialized. Even economists often do not teach this within the framework of general economic theory, because it relates to trading on the stock exchange and is more Western. But nevertheless, for everyone who is somehow connected with this trade, either professionally or simply interested, futures are a thing that sometimes occurs.

So, the word comes from the English futures contract, futures. And this word came from future - the future. A futures contract is an agreement between two parties to transact a security at a predetermined price. in the future.

These contracts appeared in a rather interesting way and it was connected with. Since the production cycles of grain or cotton are quite long in terms of time, a guarantee of delivery was needed, and such contracts were such a guarantee.

Roughly speaking, the owner of the mill and bakery could agree with the farmer that he would buy grain in 6 months for $1, and the other party would deliver the goods at that moment. Such long-term contracts protected suppliers and sellers, allowing for more stable supply chains.

But then curious things happened: there was no longer a shortage of such suppliers and it was possible to buy almost any product at almost any time, the need for such contracts fell. But everyone liked the idea of ​​executing a transaction after X amount of time because it gave more predictability and stability, and they picked up on this idea.

Such contracts can be called deferred; they are very close in meaning and mechanics to orders or forwards, but there are also slight differences. Futures in general are like one of the types of forwards, the difference is that futures are traded on an exchange, but forwards are darker, one-time and private transactions outside the exchange.

Index futures were traded by Nick Lisson () , and forwards are traded, for example, by importers, for example, by concluding these contracts to purchase currency in X days in order to protect themselves from the risk of quotes jumps.

At the same time, you cannot really speculate on forwards, since they are not on the exchange, but futures can be sold at any time.

Some people, I had an acquaintance, traded futures for a long time and did not even understand that they were trading them and what it was. Like a person buys and sells oil futures without even understanding that in fact such a future involves the delivery of crude oil to him, although in fact it has been under such contracts for a long time almost they don't deliver anything. Such instruments inflate markets, including the oil price market, introducing into it a wild speculative part, when real production, extraction and consumption cease to play any role in pricing, and everything stupidly depends on the behavior of investors, and not on fundamental factors.

An example of what a futures is (futures contract) you can give this one.

Consider a classic oil futures contract:

A friend of mine was selling this without even realizing that they could naturally bring him oil. I’m kidding, of course, because if you trade this through Russia, then most likely everything is done through an intermediary, and maybe many, but the essence of the futures is exactly this: by buying one such contract, for example for $68 now, you will receive 1 barrel of crude oil. The pendos will be brought by helicopter and poured into your window.

You can read how exactly the goods are delivered at the time the futures are executed if you know English, but personally this point has been interesting to me for a long time, and it was very difficult to find information on it, even in English.

And it shows that the trading volume on the market is 1.2 million contracts, not that much in fact, this is a day trade of 81 million dollars, although on some days it is twice as much. You see there in the picture CLM18 - this is the futures of 2018, that year CLM17 was traded and so on. It was a different paper and last year’s trading has already passed, and our futures closes in June 18th year.

Now the futures is trading at $68, and the real current price is slightly different, this is called spot price, but it is difficult to find as many popular sites do not even track it, and often do not mention that they show you the futures price, not the current one.

Here are all futures prices

Russian oil is Urals, the difference in its price with others is not significant, but it exists. Russian oil is not of the highest quality, but not the worst either.

So, you can buy all these futures, through a broker and using, for example, MetaTrader you get access to all the instruments.

It is clear that real oil will not be delivered to you, but there is a redemption mechanism at the end of the contract, plus, many people play in the futures market very speculatively and buy/sell a million times a day.

Each futures contract has a specification. This is a document that contains the main terms of the contract:

• Name of the contract;
• Contract type (calculated or delivered);
• Price (size) contract - the amount of the underlying asset;
• Maturity period - the period during which the contract can be resold or bought back;
• Delivery or settlement date - the day on which the parties to the contract must fulfill their obligations;
• Minimum price change (step);
• Minimum step cost.

You can find all this, for example, on the website investing.com, it looks like this:

Below you see all the parameters of this contract

Now we are at the end of April 2018, the 26th. The contract will be executed in two months, but the price is constantly changing. At this second, enter into a contract, having purchased it, you have a fixed delivery at this price in 2 months. If something goes wrong, you can sell this futures at a different current price before June.

Futures are also used for the so-called (safety net), since they are executed at a fixed price in the future. In this way, you can be guaranteed to get one part of the equation stable, and the other to play more actively, but I will write more about this later in another article.

“Futures are very liquid, volatile and quite risky, so new investors and traders should not deal with them without proper preparation.” -

The same site reports that there are no real deliveries on futures, but in fact there are, it all depends on the type of futures.

If there is no supply, then the variation margin mechanics work.

When a futures contract is executed, if there is no delivery, the current price of the asset is compared to the futures purchase price and the exchange automatically calculates the difference, either paying you a premium or taking your money.

For example, if you buy a futures on an asset for $10 now, which expires in a year, and hold it for a year. Then, if the price has become, say, $15, then you will be charged $5, and if the price has dropped to $7, then they will charge you $3.

It is precisely because of such mechanics that exchanges require margin (Deposit margin - collateral) and a margin call may occur - automatic closing of positions. If you have no funds in your account, and your futures have fallen, while execution is still far away, then you have huge problems. You must have funds to cover potential losses at the time the futures close, this is a requirement of the exchange, and this is what led Singapore trader Nick Lisson to collapse. And that is why he constantly begged for money in London, precisely to cover this margin, and then forged documents (I'm talking about the movie "The Con Man" starring Ewan McGregor).

These are the pies. I hope the Econ Dude blog gave adequate examples and explained how futures work; you can find other articles about economics here.

The language of stock traders seems like complete gobbledygook to an untrained person: forward, futures, hedging, options. Although, these words hide quite understandable actions. This is not an attempt to close ourselves off from the uninitiated, it’s just more convenient.

What is a futures contract

The meaning of the term “futures” can be understood based on the translation from English of the word future - future.

Futures (futures contract): a transaction, the price and quantity of goods for which are fixed at the time of signing the contract, and obligations (the need to pay for the transaction) will arise through futures-determined time.

“Specified time” must be at least more than two business days. Otherwise, this transaction is called differently.

Simply put, futures are risk trading. At the same time, the counterparty, who does not want to take risks, offers his future product at a favorable price. For this he receives guaranteed sales. The buyer, at his own risk, may receive the product at a lower price in the future.

The difference between a futures contract and a forward contract is that forward- This is a one-time, non-standardized, over-the-counter transaction. Futures are traded on the exchange, and constantly.

Often, after the deadline, no real deal occurs, it is done payment of the difference between the contract price and the actual market price on the day specified in the contract.

Let’s say that in the spring a farmer places a futures contract on the stock exchange to sell wheat at $100 per barrel. In the fall, the price of wheat at the time of purchase of goods is $110 per barrel. That's 10% net profit. And perhaps in a month it will be $130 per barrel.

In this case, the farmer is a hedger (), and his buyer is a speculator. This word still has a negative connotation in our country, although a stock speculator is a player who makes money on risky operations. The price could fall to $90, then the speculator would be in the red.

Read more about the difference between futures and options. Although these concepts are very similar, there are also differences.

Index futures

Often in the economic section of the news the following words are heard: Dow Jones index, Nasdaq, RTS (Russian stock index). The value of these indices is calculated from a variety of indicators of the economy to which the index relates.

The first of those listed are American. The Dow Jones Industrial Average characterizes the market position of the 30 largest US companies. Nasdaq deals with shares of high-tech corporations.

Futures contracts can be concluded not only for the supply of goods, but also for changes in indices. Such futures are called index futures. Here, profit (or loss) is the change in the value of the index on which the transaction was concluded. The contract specifies the price of one point; at the end of the futures, settlements are made.

The purpose of concluding a contract may be to speculate on changes in the index or to hedge the securities included in the calculation of this indicator.

Remains the most popular on Russian exchanges RTS index futures, which is characterized by:

• high liquidity;
• minimal costs;
• maximum leverage.

When entering into an index futures contract, all buyer-seller relationships happen through the exchange, without the need for direct contact. Both accrual of profits and write-off of losses.

Upon expiration of the contract, each participant in the transaction, based on the trading results, will be credited (or debited) with the amount of the difference between the futures and the real, the exchange receives its percentage for intermediation.

Gold futures

Just like regular futures, a gold transaction has the same principles, only the underlying asset is gold. Futures can be (similar to other types of contracts):

The benefit of gold futures is that the exchange provides leverage of 1:20. That is, to carry out transactions, a security amounting to 5% of the transaction amount is sufficient. But the risk increases proportionally.

Actions that provide an opportunity to make a profit or reduce risks:

• purchase in anticipation of an increase in metal prices;
• purchase in anticipation of a decrease in metal prices;
• trading using exchange leverage;
• hedging losses from rising gold prices;
• hedging losses from a decrease in the price of gold.

Oil futures

Oil futures are traded on the following exchanges:

Currently, only 2% of futures transactions are carried out by real oil suppliers and consumers who hedge their risks. The remaining 98% of transactions are made by speculators.

Electronic trading on stock exchanges, There is no physical delivery of oil. At the end of trading, settlements are made between the parties to the futures.

The benefit of working in this market is the provision of leverage (1:6), the minimum lot is 10 barrels. Therefore, you can start earning money by investing a symbolic amount - a little more than 7,000 rubles.

Just as in the case of gold, the presence of leverage represents both greater gains and losses, in the same proportion.

Experts believe futures transactions are the most risky. The probability of success here is equal to the probability of loss - 50/50. Therefore, it is not recommended to invest more than 20% of capital in this sector.

Futures are contracts entered into for the delivery of certain goods in the future at fixed prices.

Under these contracts, one party will buy an asset in the future at a specific time and in a specific volume, and the other party will deliver it at the appointed time and in the required volume.

The main purpose of futures is to minimize the buyer’s risks in case of a possible deterioration of the market situation by fixing the price of the product today.

Confirmation of the intentions of the parties is the payment of a guarantee (collateral) for the fulfillment of a future obligation.

Historically, for the first time, futures became the basis of trading relationships between farmers, who, by fixing prices for raw materials, ensured profit from the sale of the future harvest - by setting the price for products at the beginning of the season, the farmer could plan his seasonal budget, his profit and current expenses.

At the moment, futures are constantly used in trading various commodities and financial assets around the world.

Today, futures trading is largely speculative in nature, since its main goal is to make a profit.

Depending on the subject of the transaction The following are the most popular types of futures on world trading exchanges:

• currency futures;
• futures on securities;
• metal futures;
• oil futures;
• futures for grain crops.

At the same time depending on the purpose of compilation futures are divided into:

• settlement futures, which are used when the parties make exclusively monetary settlements;
• deliverable futures, which are used for the purchase and sale of certain volumes (quantities) of underlying assets (securities, oil, gold, currency, and so on).

Watch a short video that explains in simple terms what futures are.

Largest futures exchanges

Futures trading today it is carried out all over the world through the use of various exchanges, among which are:

• New York Mercantile Exchange - NYMEX;
• Derivatives Commodity Exchange in Chicago - SWOT;
• Chicago Mercantile Exchange - CME;
• London International Financial Futures Exchange - LIFFE;
• International Petroleum Exchange in London - IPE;
• London Metal Exchange - LME.

Futures Trading Basics

To trade futures, you need knowledge and understanding of the basic principles used in exchange trading:

1. Exchange where futures trading takes place– it is important to know the volumes and operating hours of exchanges trading specific goods.
2. Unit of measurement of a futures contract– exchanges trade not in contracts and goods, but in lots. Each futures contract has a standardized size: for example, gold is ounces, oil is barrels, euro is euro, etc.
3. Teak size. A tick is the minimum price change value. For example, a tick on the E-mini S&P 500 futures is equal to 0.25 index points (with an index point of $50, the tick would be $12.5).

Accordingly, each asset has its own tick, for example, for the pound or euro it is 0.0001.

1. Margin. In general, the presence of a margin means that when entering a position, part of the funds from the deposit is blocked to maintain it. For futures, a margin is also set for maintaining a position throughout the day and for rolling it over to the next day.
2. Futures trading time– exchanges establish “trading break” periods. For example, for S&P - 00:15-00:30 Moscow time, for currencies - 01:00-02:00 Moscow time, etc.
3. Time for the most active futures trading– there are periods of time when the largest infusions for specific contracts are provided and the strongest intra-session trends are created. You need to know these time frames so that futures trading can bring you maximum income (for example, for currencies - 10:00 and 16:00 Moscow time, for indices - 17:30 Moscow time).

How to make money on futures

To understand how to make money on futures, you need to understand the following points.