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Before Commitment Commits You, Commit To The Commitment: Sundar B. N. Assistant Professor
Before Commitment Commits You, Commit To The Commitment: Sundar B. N. Assistant Professor
FUTURES CONTRACT
Before commitment commits you,
Commit to the Commitment
Sundar Shetty
Sundar B. N.
Assistant Professor
Coordinator of M.com
A Forwards contract is a contract made today for delivery of an assets at a
prespecified time in the future at a price agreed upon today.
The buyer of the Forwards contract agrees to take delivery of an
underlying assets at a future time (T) at a price agreed upon today. No money
changes hands until time expiry. The seller agrees to deliver the underlying
asset at a future time, at a price agreed upon today.
Forwards contracts
A Forwards contract is a contract between two
parties who agree to buy/sell a specified quantity of a
financial instruments/commodities at a certain price at a
certain date in future. Forwards contracts are not
standardized contracts, they are OTC (not traded in
recognized stock exchanges) derivatives that are tailored to
meet specific user needs.
Meaning of Forwards
contracts
• Traditional agricultural or physical commodities
• Currencies (Foreign exchange forward)
• Interest rates (Forward rate agreements FRA)
Underlying Assets of
Forwards contracts
They are customized contracts unlike futures
Tailor-made and more suited for certain purpose
Useful when Futures do not exist for commodities and
financial being considered
Useful in cases futures standard may be different from the
actual
Tailored made
They are bilateral negotiated contract between two parties and
hence exposed to counter party risk.
Each contract is custom designed and hence is unique in terms
of contract size, expiration date, and the asset type, quality etc.
A contract has to be settled in delivery or cash on expiry date.
The contract price is generally not available in the public
domain.
If the party wishes to reverse the contract, it has to compulsory
go to the same counter-party, which often results in high prices
being charged.
FEATURES OF FORWARD
CONTRACTS
Unlike forwards contracts, Futures are standardized
contracts traded on exchanges through a clearing house and
avoids counter party risk through margin money and much more.
What we know as the futures market of today originated
from some humble beginnings.
Trading in futures originated in Japan during the 18th
century and was primarily used for the trading of Rice and silk. It
was not until the 1850 that the US started using futures markets
to buy and sell commodities such as Cotton, Corn and Wheat.
Today’s futures market is a global marketplace for not only
agricultural goods but also for currencies and financial
instruments such as treasury bonds and securities. It is a diverse
meeting place of formers, exporters, importers, manufacturers
and speculators
FUTURES CONTRACT
A futures contract is a standardized agreement between the seller (short
position)of the contract and the buyer ( long position ), traded on a
futures exchange, to buy or sell a certain underlying instruments at a
certain date in future, at a prespecified price.
The future date is called the delivery date or final settlement date.
The pre-set price is called the futures price. The price of the underlying
asset on the delivery date is called the settlement price.
(Thus, futures is a standard contract in which the seller is obligated to
deliver a specified asset (security, commodity or foreign exchange) to the
buyer on a specified date in future and the buyer is obligated to pay the
seller the then prevailing futures price upon delivery. Pricing can be
based on an ‘open outcry system’, or bids and offers can be matched
electronically.
Continued……….
CASH DELIVERY ; This procedure is a substitute for physical
delivery and completely eliminates having to make or take physical
delivery. Contracts on stock index futures use cash delivery to settle
contracts. Exchange have adopted cash delivery as an alternative to
physical delivery for 2 reasons;
1. The nature of underlying commodity may not permit feasible
physical delivery
2. Cash delivery avoids the problem that it may be difficult for traders
to acquire the physical commodity at the time of delivery because
of a temporary shortage of supply.
Continued……….