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A Future is a kind of stock exchange-acted option dealings. It designates an obligatory stock exchange contract (contract) between two parties (contrary to halflaterally obligating contracts with options).
Futures exhibit the following characteristics:
Contrary to Forwards all characteristics are standardized by a stock exchange.
Example: A October contract "gold" at the New Yorker goods futures exchange NYMEX covers always 100 ounces Feingold with a degree of purity of at least 0.995 with a maturity at the last working-day Octobers.
This makes a transparent trade, small commercial costs and for easy Marktzugang possible.
For the conclusion of a Futures no costs result in the form of premiums. Both buyers and salesmen carry same rights and obligations. Thus it is not necessary to create a reconciliation between the Contracting Parties. This stands contrary to options.
Very probably both contracting parties must carry however an advance payment out. It serves capital invested payment", "security" or "initial Margin" as security, and "is also called. It amounts to only a fraction of the contract value - e.g. five per cent of the contract value or also a fixed amount - and can be corrected depending upon prevailing upward or down. The amount is deposited in the form of cash or the deposit of first-class government loans before the execution of an order into an Margin account.
Unit trust fund, which invests exclusively into Futures contracts, is called Managed Futures.
The Future developed in the agriculture has its roots in the insurance thought. In historical gathering molds the which is the basis principle exists longer than shares or options and leaves themselves in 17. Century retrace (rice stock exchange of Osaka). It concerns always to buy and/or sell a fixed quantity of a certain commodity in certain quality at a determined price at a before determined date.
A US farmer in the year 1830 could have already sold thus in the February of the same yearly 2000 Bushel summer wheat (approx. 27 tons) to a mill enterprise at the price of 1900 dollar, whereby supply and date of payment were specified with 2 July. The advantage for farmer was security of having already with the harvest a safe customer at a fixed price. The mill enterprise secured itself against it with the business against rising prices, how they result approximately from harvest failures or hail impacts.
In the course 19. Century began buyers and salesmen to lock over such business formal contracts (contracts) which served also as credit provisions of security opposite banks. The starting signal for the organized trade with Futures contracts fell 1848 with the establishment of the first goods futures exchange in Chicago, Chicago board OF trade (CBOT).
The course of a Futures is subject to the free price formation from supply and demand at the futures exchange. It induces itself generally synchronously to the up to date price on the Kassamarkt of the Underlying course (e.g. DAX index, EUR-USD, Unverbleites gasoline, orange juice concentrate etc.). Deviations and divergente development between Kassamarkt and Future make arbitrage business possible, thus business with profit to a large extent without risk.
That the Future price nevertheless usually deviates from the price of the same base value, in addition no contradiction is: Because "value" of a Future contract protects follows - in most cases - the daily cash price, but depending on as far the fulfilment time still in the future lies, upward shifted. A September Future 2006 on any base value (in particular a raw material) will thus cost more on 1 July 2006 than the July Future 2006, whose fulfilment date is approaching briefly. The reason: Somebody must ensure that the commodity (the value) is kept also actually ready up to the fulfilment date.
A soft Commodity, like orange juice concentrate about, must store someone, speditieren in time and cool according to. That costs money. The value of a Future is therefore computed generally in such a way:
Worth = Kassapreis + inventory attitude costs (Cost OF Carry)
Because these inventory attitude costs become "copied" over the entire running time (to thus decrease, the more near the fulfilment date comes), approach the value toward run time end ever more to the Kassapreis on and coincides to the fulfilment date with this.
Standardisation
Each Future contract is so clearly defined that a market participant can be safe, directly to be treated, as every different one.
A contract "Frozen Concentrated orange Juice "(frozen orange juice concentrate) of the class A (FCOJ-A) at the goods futures exchange NYBOT (New York board OF trade) is for example defined as follows:
Quotations of the futures exchanges take place always regarding the unit - in the above example thus per lbs. (US Pound). If the September Future FCOJ-A notes thus with 100,00, we know due to the above definition that 1 lbs. the base value with 100 cent - thus 1 dollar - notes. From this the contract price can be calculated simply:
That is not at financial values different: The value of the DAX Futures (FDAX) to (Eurex) amounts to for example 25 euro for each point of index DAX. With a course of 25,00 and an index level of 4000 points a FDAX contract would represent thus 100,000 euro at value (25x4000).
Lever
Particularly since only a fraction of the value is necessary as employment, in order to open a Futures contract, one speaks of a lever instrument or a derivative. How strong the lever is with a certain Future is determined, by the respective stock exchange, at which a Future is acted. As formula to the lever is considered: Contract value at the purchase time divide by the amount, which is necessary, in order to acquire a Future position.
An example:
As strongly the lever is actual with a certain Future contract, depends on three factors: Contract size, contract value to the entrance time and Margin height. By the example of the DAX Future, which is acquired directly to the Eurex, that could look as follows:
With this example we thus a lever of 13,89 which would have meant that the profit of a per cent in the base value will affect itself with this concrete contract with 13,89%. Therefore in the case of a change of the base value at a value of + 10% (or 500 points in the DAX) the profit from the risked capital (the Margin) amounts to 138.9% (lever x 10).
Of course the lever works also into the opposite direction. If the base value loses 10%, then the loss of the Future owner amounts to 138.9% - that is more than the risked capital and the investor would have the deficit additionally to pay.
In the modern Futures markets less than 3% of the contracts are fulfilled by material exchange. The predominant part "is settled" by a the maturity time ago. The owner of a Short position (salesman) acquires thus a Long position and in reverse. The difference between the prices of the two contracts results in a profit from speculation or - loss.
The strong overhang at speculative transactions to ungunsten the traditional which is based on material exchange led in the second half of the 1990er years to a multiplication of the Handelsvolumens at the Futures stock exchanges and their liquidity dramatically increased. In the year 2002 alone at the largest derivative stock exchange, the Eurex, over a half billion contracts were acted.
Regardless of its Futures are however still used as security (Hedging) against the entrance of unwanted price history. In this connection "Hedger" use Futures, in order to deliver macro-economic risks against an appropriate net yield expectation to the speculators.
See also: Options
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