FUTURES CONCEPT

2. CONCEPT
Agreement to buy or sell given asset on a future
date.
Can be used by speculation or risk management.

3. FUTURES CONTRACTS
 Detail the quality and quantity of the underlying
asset.
 They are standardized to facilitate trading on a futures
exchange.
 May call for physical delivery of the asset, while others
are settled in cash.

4. CHARACTERISTICS
1. They are traded in organized exchanges.
2. Credit risk is eliminated. Both parties deposit a
portion of the contract with the clearing house.
3. Both the buyer and seller are bound by the contract
terms and are expected to honor their end of the
contract.

5. COMMODITY FUTURES
Buyers use these to avoid the risks associated with the
price fluctuations of the product or raw material, while
sellers try to lock in a price for their products.

6. WHO DETERMINATE THE
COMMODITY PRICES?
A commodities futures price is determined primarily
by the supply and demand for the commodity in the
market.
There are many economic factors that will have an
effect on the price of a commodity.

7. FUTURE MARKET
Market in
which participants can buy and sell commodities and their
future delivery contracts.
A futures market provides a medium for the
complementary activities of hedging and speculation.

8. Futures Fundamentals: The Players
HEDGERS SPECULATORS
Buys or sells in the futures market to
secure the future price of a
commodity intended to be sold at a
later date in the cash market. This
helps protect against price risks.
Buying a contract low in order to sell
high in the future . Want to increase
their risk and therefore maximize
their profits.
The players in the futures market fall into two categories

9. Economic Importance of the
Futures Market
 Price Discovery
Factors such as weather, war, debt default, refugee
displacement, land reclamation and deforestation can all
have a major effect on supply and demand and, as a
result, the present and future price of a commodity.
This kind of information and the way people absorb it
constantly changes the price of a commodity.

10. Economic Importance of the
Futures Market
 Risk Reduction
Risks are reduced because the price is pre-set, therefore letting
participants know how much they will need to buy or sell. This
helps reduce the ultimate cost to the retail buyer because with less
risk there is less of a chance that manufacturers will jack up prices
to make up for profit losses in the cash market.

11. FINANCIAL FUTURES
Euro to US Dollar exchange rate, or
the British Pound to US Dollar
exchange rate.

12. INTEREST RATE
A rate which is charged or paid for the use of money. An
interest rate is often expressed as an annual percentage of the
principal. It is calculated by dividing the amount of interest
by the amount of principal.
For example, if a lender (such as a bank)
charges a customer $90 in a year on a
loan of $1000, then the interest rate
would be 90/1000 *100% = 9%.

13. STOCK FUTURES
 Stock Futures are financial contracts where the
underlying asset is an individual stock.
 Stock Future contract is an agreement to buy or sell a
specified quantity of underlying equity share for a
future date at a price agreed upon between the buyer
and seller.

14. HOW THE FUTURES WORK?