What are futures?

What are futures? How to trade futures?

Futures, in English, is Futures, which literally means "future". Specifically, it refers to the trading of spot goods in a certain period in the future, that is, the parties to the transaction do not exchange physical objects and money at the immediate time of the transaction.

Rather, it is an agreement to conduct transactions at a currently agreed price at a certain time in the future. Futures trading is high-risk and highly leveraged, and can result in large profits or losses quickly. If you do not have systematic study and understanding of the futures market, please do not engage in futures trading.

For modern people, futures seem to be more linked to financial products. But in fact, the original purpose of futures invention was to control and stabilize the prices of industrial products and agricultural products, and to serve the stability of people's lives.

Later, with the vigorous development of the financial industry, investors realized that the futures trading model originally targeted at physical goods could also be applied to the financial field. After that, futures trading gradually gained a foothold in the financial investment industry and became a popular investment category.

So what is unique about futures trading in the financial industry? Its operation process is: the buyer and the seller decide the object of the transaction (commodity or financial instrument), the time for transaction settlement, and the price at the time of redemption. The contract is handed over to the guarantor, and the buyer submits the deposit.

Under the supervision of the guarantor, both parties will perform the contract content upon expiration and pay the money for delivery. A futures contract must contain the following contents: Underlying Asset: This is the actual commodity or financial instrument covered by the contract, such as wheat, crude oil, gold, or the S&P 500 Index.

Contract Size: This specifies the amount of the asset being traded. For example, a standard crude oil futures contract covers 1,000 barrels of crude oil. Delivery Date: This is the date when the contract expires and delivery must occur (i.e., the buyer and seller exchange assets and payments).

Delivery location: Especially for physical commodities, the contract specifies the location of delivery. Price: This is the price at which both parties agree to trade the underlying asset. This price is determined when the contract is signed and applied at delivery.

Margin requirements: Futures trading usually requires buyers and sellers to pay a certain percentage (for example, 5% to 10%) of the contract value as margin to ensure the performance of the contract.

Standardized: Futures contracts are standardized, meaning that except for price and quantity, all contract terms such as delivery date, contract size, and quality specifications are fixed. Profit or loss from futures trading is primarily based on changes in the contract price.

When traders buy (go long) or sell (go short) a futures contract, they are predicting future price movements for that contract. Buying (going long): If a trader predicts that the price of an asset will increase, they may buy a futures contract. If the price rises, they can sell the contract at a higher price and make a profit.

Conversely, if the price falls, you will incur a loss when selling. SELL (Short): Traders may sell futures contracts if they predict prices will fall. If the price then drops, they can buy the contract back at a lower price, making a profit. If the price rises, you will lose money when you buy back the contract.

Futures trading typically requires traders to post margin, a type of security deposit used to ensure the performance of the contract.

There are two types of margin: Initial margin: This is the amount of money that must be deposited when opening a position, usually a small part of the contract value (such as 5%~10%); Maintenance Margin: This is the minimum level of funds required to maintain an open position.

If the account funds fall below this level, the trader must deposit more funds, which is called a "margin call." If a trader's account funds fall below the maintenance margin level and they fail to make a margin call in a timely manner, the broker may perform a forced liquidation of the position.

This means that the broker automatically closes the position in the market, regardless of the current market price. Forced liquidation is intended to reduce the risk of further losses while ensuring market liquidity and trading integrity. How did futures develop? The original model was for both parties to make a verbal commitment.

Later, with the expansion of the scope of transactions and the increase in transaction volume, oral promises became no longer credible under large price changes, so a written contract was required.

Later, a third party was required to intervene as a guarantor, and the concept of "margin" was proposed to ensure that when the contract expires, both parties will buy and sell in accordance with the contract. The contract at this time is called a "forward contract." The purpose of "forward contracts" is to prevent abnormal and large fluctuations in prices.

Futures contracts are mainly signed for physical products in industry and agriculture. The first commodity forward contract exchange - the Royal Exchange - was established in London in 1571. With the widespread use of "forward contracts", holding contracts has become a way to benefit in an environment of large price fluctuations.

As a result, 82 businessmen established the Chicago Board of Trade in 1848 to provide investors with information from all parties.

In 1865, they launched the standardized contract "futures contract" to replace the "forward contract", allowing for the resale and purchase of contracts, and optimizing the margin system, forming a futures market that specializes in buying and selling standardized contracts.

Subsequently, with the rise of the financial field, the subject matter of "futures contracts" expanded from the original physical objects to a series of non-physical trading objects such as stock indexes, foreign exchange, interest rates, etc.

In futures trading in the investment field, there are hedgers, or hedgers, who buy and sell futures to lock in profits and costs and reduce the risk of price fluctuations caused by time; the other is arbitrageurs, or speculators, who hope to make profits from price fluctuations through futures trading and will bear more risks than hedgers.

What types of futures are there? Futures are divided into commodity futures and financial futures based on different underlying objects. 1. Commodity futures Commodity futures are a contract in financial markets that allow traders to buy or sell a commodity at a predetermined price on a specific date in the future.

These contracts are standardized and include specific quantities, qualities and delivery locations. Commodity futures are traded mainly on specialized futures exchanges, such as the Chicago Mercantile Exchange (CME Group) and the London Metal Exchange (LME).

Commodity futures cover a wide range of products and can be broadly divided into the following categories: Energy: crude oil, natural gas, gasoline, fuel oil, etc.; Metals: including precious metals (gold, silver), and base metals (copper, aluminum, zinc, nickel, etc.); Agricultural products: soybeans, wheat, corn, cotton, natural rubber, palm oil, coffee,

etc.; Livestock products: such as live cattle, lean pigs, etc.; Chemical products: methanol, low-density polyethylene LLDPE, polypropylene PP, etc. 2.

Financial futures Financial futures are a type of financial derivatives, which are standardized contracts on financial instruments or financial indices that are traded at an agreed price on a specific date in the future.

Unlike commodity futures, which primarily revolve around physical commodities such as agricultural products, energy or metals, financial futures are based on financial assets such as currencies, bonds or stock indexes.

stock index futures Stock index futures, or Stock Index Futures in English, refer to financial futures contracts that use stock price indexes, such as the S&P 500 Index, the Nasdaq 100 Index or the Dow Jones Industrial Average Index, as the subject matter of the contract.

The value of the contract is determined by multiplying the stock price index by a predetermined unit amount. The essential significance of stock index futures is that investors transfer the expected risk of the entire stock market price index to the futures market.

The transaction content is the stock index, and neither the seller nor the buyer actually holds the stock. These contracts allow investors to buy or sell an entire stock index at a specific price on a specific date in the future.

The following are some of the most common stock index futures in the United States: S&P 500 stock index futures: A stock index futures contract with the S&P 500 index as the underlying object. The S&P 500 Index is a stock index that tracks 500 listed companies in the United States.

The 500 stocks include 400 industrial stocks, 20 transportation stocks, 40 utility stocks, and 40 financial stocks. Trades on the Chicago Mercantile Exchange. Nasdaq stock index futures: A stock index futures contract based on the Nasdaq index.

The stocks it contains include all new technology industries, and Nasdaq index futures are the world's first stock index futures to adopt electronic trading methods.

Dow Jones Stock Index Futures: The full name is the Dow Jones Industrial Average Index futures contract. The subject matter of its futures contract is the Dow Jones Industrial Average. The abbreviation is DJIA. It was announced by Dow Jones in 1896 and currently contains 30 constituent stocks.

interest rate futures Interest rate futures are a type of financial futures contract whose value is based on a specific interest rate product. These futures contracts typically involve government bonds or other fixed-income securities, allowing traders to hedge or speculate on changes in interest rates.

The underlying asset for interest rate futures is typically a government bond or interest rate instrument. When you buy interest rate futures, you are essentially agreeing to buy or sell an underlying interest rate instrument at a specific price on a specific date in the future.

This approach allows investors to protect themselves from interest rate fluctuations or to profit from predicted interest rate changes. Common interest rate futures are summarized as follows: U.S.

Treasury Bond Futures: These are futures contracts based on short-term (e.g., 2-year, 5-year), mid-term (e.g., 10-year), and long-term (e.g., 30-year) Treasury bonds issued by the U.S. government. For example, 10-year U.S. Treasury futures are a very active market. European government bond futures: such as futures based on German government bonds (Bunds).

Eurodollar Futures: These are futures contracts based on interest rates on U.S. dollar deposits in overseas banks and are one of the most active interest rate futures contracts in the world. Short-Term Interest Rate Futures (STIR Futures): For example, 3-month futures based on the UK's LIBOR (London Interbank Offered Rate).

Forex futures Foreign exchange futures are a type of financial derivative, which are standardized contracts that allow traders to buy or sell a specific amount of foreign currency at a predetermined exchange rate on a specific date in the future. These contracts are traded on specialized futures exchanges, such as the Chicago Mercantile Exchange (CME Group).

In a foreign exchange futures contract, the buyer commits to purchase a specific amount of a currency at a specified future date at an agreed exchange rate, and the seller commits to sell the currency on the same terms. These contracts are standardized, with fixed expiry dates, amounts, and delivery conditions.

Common foreign exchange futures are listed below: Euro/USD (EUR/USD) Futures: Based on the exchange rate between the Euro and the US Dollar, this is one of the most popular FX futures. Japanese Yen/USD (JPY/USD) futures: based on the exchange rate between the Japanese yen and the US dollar.

GBP/USD futures: based on the exchange rate between the British pound and the U.S. dollar. Australian Dollar/USD (AUD/USD) futures: Based on the exchange rate between the Australian dollar and the US dollar. Canadian Dollar/USD (CAD/USD) futures: Based on the exchange rate between the Canadian dollar and the United States dollar.

Swiss Franc/USD (CHF/USD) futures: Based on the exchange rate between the Swiss franc and the US dollar. What are the characteristics of futures trading? Standardized Contracts: Futures contracts are highly standardized, meaning the contract size, delivery date, minimum price fluctuations, etc. are all pre-set.

This standardization makes futures contracts easy to trade on exchanges. Daily settlement: There is no limit to the number of transactions on the same day, which allows investors to obtain real-time profits and losses and decide to add or stop losses immediately without having to wait until the market is suspended for settlement.

In contrast, the settlement of stock transactions generally adopts the T+2 mode; Time constraints: Based on the development of the "forward contract" model, futures transactions have an "expiry date" and must be delivered before or on the expiration date, otherwise the position will be forcibly closed by the exchange or delivered in physical form; Leveraged trading: Futures trading adopts a margin system.

When investing, you only need to pay a margin of 5% to 10% of the transaction amount to conduct 100% trading.

As a result, the profit and loss ratio is magnified in the same proportion, just like leverage, using small funds to leverage large transactions; Diversified Assets: Futures markets encompass a variety of asset classes, including agricultural commodities, metals, energy, currencies and financial instruments such as stock index and interest rate futures.

Short selling is more flexible: Short selling in futures trading does not require borrowing and repaying, and traders can directly sell futures contracts even if they do not actually hold the contract. A short futures contract can be closed by buying to close the position, or in some cases through cash settlement or physical delivery. How to buy futures?

Purchasing futures contracts typically requires going through a dedicated futures broker or a full-service broker that provides futures trading services.

Here are some well-known brokers: Chicago Mercantile Exchange (CME Group): Although not a direct broker, CME Group is the world's largest futures and options market, and many brokers offer trading through this platform. Interactive Brokers: Suitable for advanced and professional traders, offering a wide range of trading tools and low fees.

Charles Schwab: Provides futures trading services through its acquisition of TD Ameritrade. Schwab is known for its customer service and powerful research tools. E*TRADE: Acquired by Morgan Stanley, it provides futures trading services and is known for its easy-to-use platform and tools.

Fidelity Investments: Mainly focuses on stocks and other investment products, but also provides futures trading. How risky is trading futures? Futures trading is known for its high risks and high returns, and the leverage trading model is the main reason for its risks. Let’s take a simpler example.

The futures price of cotton is 10,000 yuan/ton, and investors buy 5 tons of cotton futures contracts (total value is 50,000 yuan). Investors can purchase assets worth $50,000 by submitting a 10% deposit ($5,000). If the value of cotton futures increases by 1,000 yuan at the close of the day (the futures price is 11,000 yuan/ton), the increase will be 10%.

If the investor decides to sell, the gain is 5,000 yuan (55,000 – 50,000), and the profit ratio reaches 100%. In other words, the futures price increased by 10%, but the profit ratio reached 100%, and the leverage was 10 times.

On the contrary, if the value of cotton futures drops by 1,000 yuan that day, a drop of 10%, then the investor will lose 5,000 yuan, a loss of 100%. At this time, if he wants to continue to hold the cotton futures contract, he must immediately add a margin call.

It can be seen from this that the leverage trading model and margin system of futures trading allow futures investment to participate in investment in the form of "small and large", and its risk ratio is much greater than that of stocks. What are the differences between futures and options?

A futures contract (Futures) is a legal agreement in which a buyer and seller agree to trade an asset at a predetermined price on a specific date in the future.

Options contracts (Options) give the buyer (holder) the right, but not the obligation, to buy (call option) or sell (put option) an asset at a specific price on or before a specific date in the future. 1.

Rights and obligations With a futures contract, both the buyer and seller are obligated to deliver an asset at an agreed-upon price on a specific date in the future. Options contracts only give the buyer the right, the option, to choose whether or not to exercise the option at any time before the contract expires. This is a right, but not an obligation.

The option seller has no rights, but must bear the obligation to perform the contract. If the option buyer chooses to exercise the option, the seller must fulfill the delivery commitment. As compensation for accepting this obligation, the option seller receives a premium at the beginning of the contract. 2.

Risk exposure The profit and loss risks borne by both parties in futures trading are unlimited. In options trading, the profit of the option buyer may be unlimited, and the loss may only be limited to the option fee; the profit of the option seller may be up to the option fee, and the loss may be unlimited. 3.

Security deposit Both buyers and sellers of futures trading must pay margin. In options trading, option buyers do not need to pay a margin, and the option premium (or premium) they pay is their maximum loss. This fee is paid once upon purchase of the option and there are no further payment obligations thereafter.

Options sellers are required to post margin because they face potential unknown losses. 4. Hedging

Hedging is a risk management strategy used to reduce potential financial losses due to price fluctuations This typically involves the use of derivative instruments, such as futures, options or swaps, to hedge existing or anticipated risk exposures.

Whether hedging using futures or options, the goal is to reduce uncertainty and protect investors from adverse price movements. Hedging with futures In the futures market, hedging typically involves buying or selling a futures contract to protect an existing asset or an anticipated purchase from price fluctuations.

Its purpose is mainly to hedge price risks and ensure future price stability. It can reduce the impact of spot market price fluctuations, especially for those commodities or assets whose prices are greatly affected by seasonality and market fluctuations.

For example, a farmer worried about falling corn prices during harvest might sell corn futures contracts on the futures market in advance to lock in the current price. Options hedging Protect an existing investment from adverse price movements by purchasing call or put options.

For example, a stock investor worried about a market drop might purchase a corresponding number of put options as protection. If the stock price falls, the option appreciates in value, offsetting some of the losses on the stock investment.

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