Is It A Good Option To...
If you’re speaking to someone who calls themselves an “investor”, you are bound to hear the phrase: “Mutual Funds”. Everyone keeps talking about it, but do people really know whether...
If you’re speaking to someone who calls themselves an “investor”, you are bound to hear the phrase: “Mutual Funds”. Everyone keeps talking about it, but do people really know whether...
When you think of investments, the first thing that comes to your mind would be stocks, bonds, deposits, etc. You also think that we invest to ‘become rich in a...
Mutual Funds (MF) are trust funds managed by an Asset Management Company (AMC) with the money pooled from investors. The money is invested in assets like bonds, equities, stocks and...
Investment options for our savings are available in abundant, choosing the right one based on the investor’s objectives is crucial to minimize risks. You can choose to discuss with your...
When a person decides to invest in the financial markets, there is a plethora of options available. One can choose to invest in stocks, debt, derivatives, commercial paper, debentures and...
When you have just stepped on the income generation mode (say early 20s), you would have plans to set up milestones to ear mark each achievement. Purchase of a car,...
In our big wide world today, income can be generated quite easily. While most people work hard for years to ensure that they have enough savings when they retire, there...
Day Trading is a form of Share dealing where shares are bought and sold in a single day. The intention of a Day Trader is to make use of the...
Day Trading and Day Traders Traders who participate in day trading are called day traders. Day trading is speculation in securities, specifically buying and selling financial instruments within the same...
We might have heard about a lot of strategies of fund managers but it is difficult for a lay man to get a perfect picture of what it is. So...
When you have just stepped on the income generation mode (say early 20s), you would have plans to set up milestones to ear mark each achievement. Purchase of a car, house and various other luxuries of life that actually form these milestones need some careful planning. One needs to know how to save what they earn so as to achieve the set targets. While there is no doubt that one needs to invest, on what will be the next question. This article will provide an understanding on one of the investment options available in the financial market namely futures. However, before getting into it let’s run through what derivates mean without further delay.
Derivatives
A derivative is basically a financial contract between a buyer and seller that derives its value from an underlying asset which does not have a value of its own but extracts a value based on its performance. By performance the indicative here is expectancy of the price movements of the underlying asset. This is mainly traded over the counter or in stock exchanges. Derivatives can be classified into many types such as options, futures, forwards and swaps.
Futures
These are financial contracts with strict obligations. Hence the investor (buyer or seller) is obligated to buy or sell his/her underlying asset mentioned in the contract for the strike price on the delivery date. Futures contracts are usually entered into for trading in commodities. Hence, future contracts will have a specified quantity, a specified price and a specific date. The person who plans to buy the underlying asset is said to be ‘long’ while the person who plans to sell the underlying asset is said to be short. Unlike in options where it is a win-win situation for both the buyer and seller, in futures one person gains while the other loses.
Futures Exchange
In order to monitor the transactions taking place under futures, an exchange has been set up. This is mainly done to ensure that there are no defaults since one person gains and the other loses out. Hence both the parties are expected to enter into a performance bond for which an intial sum of money is expected to be paid. Once the contract is entered into, the exchange keeps track of the daily price movements of the underlying asset which in this case is mostly the commodity. This is known as marked to market, where everyday price movements are noted and settled on a daily basis. The exchange will now use the initial sum paid to pay the daily variations to the right party thereby ensuring that the correct amount rests with the buyer or seller. If the amount deposited by either of them goes well below a level marked by the exchange, then extra amount is called for from the respective party.
Hence at the final date known as the delivery date the amount that rests with the parties is not the same as the strike rate. This is known as spot value.
Futures are used mostly by speculators who gain an upper hand if there is a price rise and then they can sell the contract by making more money. Hence if one knows the market well and knows how to play by its rules, then futures are the best investments. As the saying goes, high risk high returns.
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