Futures, forwards, option
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Province of derivative financial instruments of interest for non-professional speculators and professional portfolio manager. Today, in developed markets total derivative instruments market turnover more than seven times the total stock market turnover. Futures, forwards and options, are the main types of fixed-term contracts. The essence of the futures contracts is to ensure that the two counterparties, the buyer on the one hand and the dealer, on the other hand, agree that the seller delivers to the buyer a certain amount of, a particular asset, called a base, at a certain point, and the buyer pays for the supply of this product on certain price.
As the underlying asset for derivative financial instruments may make a variety of asset classes, securities, shares or bonds, commodities, oil, gasoline, gold, timber, as well as different currencies. In accordance with the forward contract the buyer and seller agree on the supply of goods or currency at a specified future date. Commodity price, exchange rate and other terms are fixed at the time of the transaction and are binding for both parties. The difference between forwards and futures is that usually a buyer and seller agree with each other directly, without intermediaries. In addition, they also bear the risk of infringement of the other party.
Futures contract - a contract to buy or sell an asset with delivery at a future date. The deal on a futures contract is required to be registered clearing house exchange.
There is another kind of "option" fixed-term contract. It is a standardized contract that in return for the award gives the buyer the right to buy or sell a financial asset at the exercise price from the seller of the option, for a certain period of time or on a certain date. By and large, the option contract is very similar to a futures contract, but if in the case of futures, we are dealing with two third-party liability, in the case of an option from the seller of the option liability arises, and the buyer has the right to use optional, but the duties of its use no.
By type of share «Call» Options Options «Put». Option «Call» entitles the purchaser of the option to buy the underlying asset at an agreed price in the contract, while the option seller has an obligation to sell to the buyer of the option the underlying asset at a price specified in the option contract.
In the case of option «Put» it looks the opposite way. The buyer of the option has the right to sell the underlying asset, and the seller of the option «Put» there is an obligation to buy the underlying asset.
The style of the contract are two main, European and American. European option - can be repaid only in a specified date, the American option - can be redeemed on any day before the expiration of the option.
We can say that a forward contract is the free on conditions. A futures contract is standardized on-time performance, and that one party to a transaction is always the market. An option contract is not standardized over time, different from forward so that the object of the transaction is the right, the right to buy or sell an asset at a certain price.
Derivatives instruments are ideal for minimizing the risks, or how this phenomenon is called hedging professionals, in addition, they proved themselves, and as a speculative, high-yield instruments. Unlike the stock market, the players do not need to pay to attract credit resources, which significantly reduces the cost of operation of the stock speculator.
Futures and options
In addition to ordinary shares, the Exchange provides the ability to trade futures contracts, futures and options, as they are called derivatives. These types of contracts allow an agreement for the supply of an asset over a certain period at a price set on the day of the transaction.
When it comes to futures, the price of the asset is initially laid in their value, as opposed to options, which only represent an opportunity, but not the obligation to pay the agreed amount and get the goods.
Futures have a market quotation at the end of each day, the investor makes a profit or loss, according to a variation of the contract value. By the way, when buying pay full price is not necessary, it is only necessary to make fixed exchange guaranteed supply, that is, the percentage of the contract value, in this case, the investor receives income in full, as well as losses. Futures are of two types, deliverable and settlement. Under the terms of delivery futures, at expiration, that is the end of the contract term, the investor receives the promised assets, and the terms of settlement of futures, once your income from operations. At the same time, futures can be on a variety of assets, including intangibles, for example - stock index. Such contracts are only estimates as to get anything at expiration is just not possible. Advantages of working with futures contracts on indices, instead of buying shares in the portfolio included in the indicator are obvious, firstly, it is a great liquidity quickly sell one contract is always easier than a lot of shares. Secondly, a great opportunity to work with leverage. Guarantee provision may be, say, 15 or even 10 percent, while the stock market normal size shoulder 1: 2. Third, the daily records of accounts, charging the so-called positive or negative variation margin, that is, essentially the profit or loss of such a calculation method is more advanced than the usual profit after the close position in the spot market.
It is worth noting that this kind of operation carries great dangers. Having the portfolio of securities included in the index calculation, you can always wait out the bad weather any stock exchange, at the time, as the owner of futures can quickly lose their savings. By the way, worldwide derivatives on indices are quite popular. In Russia, the main turnover goes on futures on the RTS index.
Futures on interest rates
Futures on interest rates initially were popular among investors as tools for insurance products, but in recent years, market participants are guided by them as indicators of sentiment on Western stock exchanges.
The most famous types of interest rate futures, futures contracts on short-term deposit rates, interest rates on government securities and futures on the federal funds rate, ie, rate at the world's central banks.
Futures on short-term credit instruments is carried out in the form of indices, the contract price is expressed as 100 minus the interest rate, such as rate «LIBOR». If the interest rate is 4.25%, the quotation of futures is 95.75%, that is, with an increase in the interest rate futures price falls, and vice versa. This inverse relationship is observed in the bond markets. At the end of the contract period shall be paid only the difference in prices between the futures price at which the contract was concluded and the current spot price at the moment of delivery time. Physical delivery of the financial asset occurs. For example, the firm has a dollar deposit in a bank is afraid of lowering the interest rate, so she buys three-month euro-dollar futures contract at a price 85.05%. If the rate will be reduced from 14.95 to 14.90, the value of the contract will increase to 85.10, ie, the change will be 5 points, each worth $ 25, respectively, and the total value of the contract will increase to $ 125. In other words, the amount of profit is equal to the amount that the firm would have received if it took a deposit of $ 1 000 000 for a period of three months from the obligation to pay 14.90 per annum, and in turn would make the same contribution to the delivery of 14.95% per annum .
Long-term interest rate futures allow borrowers and lenders to fix the price at which the future they will be able to buy or sell securities with fixed income and hedge against losses.
Futures on interest rates on federal funds traded on the stock exchange in Chicago, is a very popular and liquid contract. The day for the coming months, trade, trading at an average of 100,000 contracts and more. He is among the 15-20 contracts with the American and foreign banks' open positions and the largest are the greatest momentum.
In recent years, representatives of the central banks than ever are open to participants of the stock market. In today's pragmatic futures discount rate is even higher, but the stock market participants are using these indicators, given the general state of global finance. In the market there is an opinion that the money is cheaper, the better for the stock and commodity futures, but on the other hand, long-term multi-year correlation between the dynamics of the market and the value of money does not exist.
Futures on interest rates of the leading central banks in the world quite effectively predict the behavior of the monetary authorities. Moreover, some experts say that often themselves the representatives of the regulators pay attention to the mood of market participants. And because the value of money is one of the determinants of price movements on those or other assets, the state of the futures on interest rates follow the millions of experts every day.
One of the most authoritative dictionaries of the past gives this definition - Exchange, a place or a building where the going part time sales people and brokers "stock broker" for transactions on securities or commodities…