HARVEST INTERNATIONAL | Hicfx.com | Futures Trading
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Futures Trading

The concept of futures trading started from commodities futures trading. The basic idea behind it essentially for a fair price discovery, which will reflect the actual demand and supply of a particular commodity. Exchanges were set-up to facilitate the trade transaction between sellers (producers) and buyers (consumers). If there are more producers (supply), prices will tend to fall, while more consumers (demand) will escalate prices. A third group, speculators are ushered in to maintain the fair price discovery. The exchange will regulate the standardised contracts as well as trade regulations so that, no particular group shall have an unfair advantage.

futures trading concept

Standardised Contracts

The object that is being traded in futures markets are contracts of an underlying instrument or commodity. It is being standardised with regards to quality, quantity and delivery. Only price is left for the buyers and sellers to agree upon. One contract is known as 1 lot, 2 contracts are 2 lots and so on.

Only commodities contracts have delivery and contract expiry. If you have a sell contract of, say, olein, you have to deliver the olein as stipulated (amount & quality) to the appointed warehouse. And vice versa, if you have a buy contract of olein, you have to take delivery from the appointed warehouse upon contract expiry.

Financial contracts are cash settled (liquidated) or are being rolled over with swap charges.