Description
With Futures you can negotiate Indices, Gold & Silver, Commodities, Bonds and Interest Rates
Futures are contracts in which the investor accepts the commitment to buy (long position) or sell (short position) a standard amount (lot size) of an asset (Index, Gold, Oil, ...) on a future date (maturity date) at a pre-agreed price (price of the futures contract).
To trade with futures is necessary to bear in mind the following concepts:
- Futures are bid-ask quoted
- eg. An oil futures contract with a commitment to sell or buy in three months (expiration date) is quoted in dollars per barrel: 58 bid / 62 ask
- If the investor wants to accept the commitment to purchase oil in three months (long position), it means that he will have to pay 62 USD per barrel in three months
- If the investor wants to accept the commitment to sell oil in three months (short position), it means that he must sell each barrel for 58 USD in three months
- eg. An oil futures contract with a commitment to sell or buy in three months (expiration date) is quoted in dollars per barrel: 58 bid / 62 ask
- The Futures price tracks market price of the Futures underlying asset
- eg the price of oil in the market is 60 USD per barrel
- eg. An oil futures contract for a commitment to buy or sell in three months (expiration date) is quoted in dollars: 58 bid / 62 ask
- the difference is the opportunity cost (of funds) between the date of opening the position and the Maturity Date
- eg the price of oil in the market is 60 USD per barrel
- Commitment to buy (long position) at a future date
- eg. Expiration Date: in 3 months
- eg. at a pre-agreed purchase price: 62
- It means that if the Market Price of the asset rises above the pre-agreed price (eg. 70), the investor can buy the asset at a cheaper price and therefore will make a profit (70-62)
- In conclusion, the investor makes a profit with a commitment to buy if the price of the asset rises. If the asset price decreases, he then incurs in losses
- On the Maturity Date the investor does not need to purchase or sell the physical asset (eg. oil), he is simply charged or credited the profit (eg. 70-62 = 8) or loss in his account
- Commitment to sell (short position)
- Expiration Date: in 3 months (for example)
- At a pre-agreed purchase price: 62 (for example)
- It means that if the Market Price of the asset goes below the pre-agreed price (eg. 50), the investor can sell the asset at a higher price (58-50). In conclusion, the investor makes a profit with a commitment to sell the asset if the price decreases. If the asset price rises, he then incurrs in losses
- On the Maturity Date the investor does not need to buy or sell the physical asset (eg. oil), he simply is charged or credited the profits (ie. 8) or losses in his account
- Open a position with Futures
- The investor must deposit a margin which serves, while maintaining an opened position, as collateral against potential losses
- This margin is defined by the futures Exchange for each contract
- Closing a position before the Maturity Date
- IInvestor can close his position before the Maturity Date. Gains or losses will be credited or debited to his account.
- Gains or losses are calculated according to: (1) the commitment made, buy or sell, and (2) difference between the pre-agreed price and the closing price (quote of the Future contract at the time of closing)
