Future Contracts

and Markets
Muhammad Azeem Akra
Content

 Introduction
 What are Futures Contracts?
 Participants in Futures Markets
 Key Features of Futures Contracts
 Futures vs. Forwards
 Futures Trading Process
 Uses of Futures Contracts
 Benefits of Futures Contracts
 Risks Associated with Futures Trading
 Conclusion
Introduction

Welcome to the presentation on "Futures Contracts and Markets."

In this session, we will explore the fundamentals of futures contracts, their role in financial markets, and how they are
used to manage risk and speculation.
Let's begin!
What are Futures Contracts?
Futures contracts are standardized agreements to buy or sell an asset at a predetermined
price on a specific future date.
These contracts are traded on organized exchanges and facilitate price discovery and risk
management.
Common underlying assets include commodities, currencies, stock indices, and interest
rates.
Participants in Futures Markets
Hedgers: Businesses use futures contracts to protect themselves from price fluctuations in the underlying asset,
ensuring a stable cost of goods.
Speculators: Investors seek profit by predicting price movements without any intention of taking physical
delivery of the asset.
Arbitrageurs: Traders exploit price discrepancies between futures contracts and the underlying asset to make
risk-free profits.
Standardization: Futures contracts have fixed contract
sizes, maturity dates, and tick sizes to ensure
consistency and ease of trading.
Margin Requirements: Traders are required to deposit
initial margins to open a position and maintain
maintenance margins to avoid contract default.
Mark-to-Market: Positions are valued daily based on
current market prices, and gains or losses are settled
immediately.

Key Features of Futures Contracts

 Futures vs. Forwards

Futures Forwards

Traded on organized exchanges Traded over-the-counter (OTC)

Standardized contracts Customized to individual needs

Daily settlement through marking-to-

market Settlement occurs at contract maturity

Lower default risk due to clearinghouse Higher default risk

 Futures Trading Process
 Market Participants: Traders place buy/sell orders
through brokers.
 Order Matching: Exchange matches compatible orders,
and a trade is executed.
 Clearinghouse: Acts as the counterparty to all trades,
reducing counterparty risk.
 Marking-to-Market: Daily profit/loss is calculated and
settled.
 Delivery or Rollover: Most traders close out positions
before maturity, avoiding physical delivery.
Uses of Futures Contracts

 Hedging: Companies use futures to manage

price risk and protect profit margins.
 Speculation: Traders take positions based
on market forecasts to profit from price
movements.
 Arbitrage: Profiting from price
discrepancies between related markets by
simultaneous buying and selling.
 Portfolio Diversification: Investors use
futures to diversify their investment
portfolios
Benefits of Futures Contracts

 Risk Management: Futures provide a predictable price for future transactions, reducing
uncertainty.
 Liquidity: High trading volume and liquidity in futures markets ensure ease of entering or
exiting positions.
 Price Discovery: Futures markets provide valuable information about future asset prices.
 Leverage: Traders can control larger positions with a smaller initial capital investment.
Risks Associated with Futures Trading
 Price Volatility: Sudden price movements can lead to substantial gains or losses.
 Leverage Risk: High leverage amplifies both profits and losses.
 Counterparty Risk: Possibility of the clearinghouse or exchange defaulting.
 Market Risk: External factors such as economic events and geopolitical developments can
impact prices.
Conclusion
 Futures contracts play a crucial role in financial markets, serving as tools for risk
management and speculation.
 Participants, including hedgers, speculators, and arbitrageurs, contribute to the market's
efficiency.
 Understanding the features, uses, and risks of futures contracts is essential for successful
trading.
Thank You