Futures are standardized contracts that commit parties to buy or sell goods of a specific quality at a specific price, for delivery at a specific point in the future. The concept of buying and selling for future delivery is not in itself new.
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In thirteenth-and fourteenth-century Europe, buyers contracted for wool purchases one to several years forward. Cistercian monasteries that produced the wool sold forward more than their own production, expecting to buy the remainder on the market presumably at a lower price to satisfy their obligation. In seventeenth-century Japan , merchants bought and sold rice for future delivery.
Futures and Options
And banks have long offered their customers the opportunity to buy and sell currencies forward, with both the bank and the customer contracting today and settling their obligation in the future. But the complex legal and financial arrangements that make the modern futures market possible are thoroughly modern.
The futures exchanges were private, member-owned organizations. It may seem strange that markets originally established to trade agricultural commodity futures in the nineteenth century should become centers of trade for financial contracts in the twentieth. But the key to success as a trader is to understand the market; traders therefore consider themselves experts on market movements rather than authorities on minerals and crops.
This is why financial futures were relatively easy to introduce to markets originally designed for agricultural commodity futures: one thing interest rates and corn have in common is a fast-changing market.
What are Futures?
Although the underlying risks have changed, some important futures markets still operate much as they always have, with traders standing in a ring or a pit shouting buy and sell orders at each other, competing for each fraction of a cent. But electronic trading is rapidly changing how traders trade. Computer terminals linked to each other through electronic trading systems let traders access a virtual trading floor from anywhere in the world. The need to raise capital to build these systems has led several big exchanges to go public, issuing stock to investors and operating as any public corporation providing a service—the service of a market.
Exchanges compete with each other to attract traders by doing a better job of providing the benefits that traders expect from a fair market. Take futures contracts, for example. They are not contracts directly between buyers and sellers of goods. The farmer who sells a futures contract and commits to deliver corn in six months does not make his commitment to a specific corn buyer, but rather, through a broker, to the clearinghouse of the futures exchange.
The clearinghouse, another modern institution, stands between buyers and sellers and, in effect, guarantees that both buyers and sellers will receive what they have contracted for. New information about changes in supply and demand causes the prices of futures contracts to fluctuate, sometimes moving them up and down many times in a trading day.
For example, news of drought or blight that may reduce the corn harvest, cutting future supplies, causes corn futures contracts to rise in price.
Futures and Options Markets - Econlib
Similarly, news of a rise in interest rates or a presidential illness can cause stock-index futures prices to fall as investors react to the prospect of difficult or uncertain times ahead. Every day, the clearinghouse tallies up and matches all contracts bought or sold during the trading session. Futures trading is what economists call a zero-sum game, meaning that for every winner there is someone who loses an equal amount. But in a fundamental economic sense, futures trading is positive sum. Both sides expect to gain, or they would not trade.
Another way of saying this is that the loser may be perfectly happy to lose.
Futures vs. Options – What is the difference between them?
That is because many businesses use futures markets as a form of insurance. A candy maker, for example, might buy sugar and cocoa futures contracts to lock in a price for some portion of its requirement for these important ingredients. The contracts are as good as physically buying the commodities and storing them. If prices rise, the futures contracts will also be more valuable. The company can choose to sell the contracts and pocket the cash, then buy the commodities from its usual suppliers at market prices, or else accept delivery of the ingredients from the seller of the contract and buy less on the market.
Either way, its cost of raw materials is lower than if it had not bought the contracts. The company has cushioned itself against a price risk and does not have to worry that its production and marketing strategy will be disrupted by a sudden price increase. But what if prices fall? In that case the company loses some money on its futures contracts.
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But the same price decrease that causes that loss also caused something good: the company pays less for its ingredients. Remember, the purpose of buying the futures contract was to protect against something bad happening—a price rise. The bad thing did not happen; prices fell instead. The loss on the futures contract is the cost of insurance, and the company is no worse off than a person who purchases fire insurance and then does not have a fire.
The biggest users of the futures markets rely on them for risk management. That is surely one reason why defaults are rare. But there is an additional security measure between the individual trader and the clearinghouse. Buyers and sellers of futures must do business through intermediaries who are exchange members. Instead of standing between two individual traders, therefore, the clearinghouse stands between two exchange member firms. If the customer cannot pay the margin, the firm closes the account, sells off the positions, and may have to take a small loss. While firms pay attention to the credit of their customers, the clearinghouse pays attention to the credit of the firms.
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The clearinghouse needs to make good on a trade only if losses are so great that the exchange member firm itself fails. This happens occasionally when firms badly mismanage their risks or when a major financial crisis occurs.
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Because futures contracts offer assurance of future prices and availability of goods, they provide stability in an unstable business environment. You can actually trade using lesser margins in case of futures contract What are options? There are 2 types of options namely call option and put option 1. Call option In this case, the owner has the right but has no obligation to buy the asset. Put option: Put option buyer has the right to sell but has no obligation to sell the contract and put option seller has the obligation to buy.
Profit is unlimited in case of contract buyer whereas it is limited in case of contract seller What are stock futures: In case of stock futures, the underlying asset is an individual stock. Latest Blog The trusted way to pick the best stocks to buy for long-term.
Login Forgot password. For any query call us on To Download Nest Trader Application click here. More details OK. Not able to view chat? Please Click Here. X Comprehensive rejoinder on media reports concerning SEBI Karvy is a diversified financial services and IT solutions provider with a large footprint across India, providing employment to thousands of people in practically all states in the country, and has a proven 40 year record of integrity and a reputation for excellence in the financial markets.
Upon submission of the preliminary inspection report by NSE to SEBI, the regulator issued an ex-parte ad-interim order dated Nov issuing directives in investor interest. The order itself states emphatically, that this is in response to preliminary findings and is subject to further review upon a more comprehensive audit and investigation. The order further gives us the right to respond to each and every preliminary observation within a period of 21 days and is thus only a temporary order restraining some actions till December 16th, when we will represent our position to SEBI.
Even a perfunctory reading of the above mentioned order makes it clear that the only relevant strictures that have been passed against our organization are a temporary hold on the onboarding of new clients, and additional oversight and monitory from NSE and BSE. It in no way prevents us from continuing to transact business on behalf of our existing clients as per their instructions, and in furtherance of investor best interests. The restriction on onboarding new clients is only for a twenty one day period subject to us submitting the clarifications and stating our position.
The quantum mentioned is incorrect. Karvy Realty is one of the group companies and investments were made in other subsidiary companies through this entity. We are of the firm belief that the investments made through owned funds of the group and borrowings other than the pledge of securities were fully compliant with the relevant provisions and directives of the regulator during the period that they were made.
Further, we wish to reiterate that all monies transferred from time to time were solely for the ongoing conduct of business in subsidiary firms and not a single penny went to enrich the promoters personal funds as is being insinuated. This is highly misleading, completely inaccurate and damaging. Firstly, because if there is a default in our business, as stock broking is not a line of business where the term default is relevant, and the SEBI order itself neither mentions a default nor an amount of Rs crores.
We want to reiterate once again that nowhere in the SEBI order has an amount of Rs crores been mentioned, and that this number together with the word default is extremely misleading and damaging to our reputation. Please note that SEBI has restricted us only from acquiring new customers until the matter is resolved. They have given us 21 days to give a comprehensive response to their prima facie findings, and issued an interim order. Most media have reported that we have been banned from trading. There is NO BAN at all whatsoever, except a restriction on onboarding new customers for a twenty-one day period.
This is completely false and we will continue to service all our existing customers uninterruptedly. Some media has alluded to the fact that our rapid diversification in last few years has resulted in this situation. This diversification into data-driven and IT based services compliments that nature of work in our core financial services business and has been ongoing for the last fifteen years.