FUTURE TRADING



A futures market is an organized market for dealings in futures in other words, it is a market in the transactions of which neither immediate delivery of goods nor ready payment of cash is contemplated.. Transactions are carried on in these markets for future delivery and future payment. Trading in such a market is known as Future Trading.

Future Markets are private organizations. The membership is limited. The conditions to establish. Futures market is the same as those for Produce Exchange. Futures markets are usually organized for primary goods. The members of the future market are all brokers and therefore, the actual buyers or sellers cannot become the members of a Future Market. Transactions take place in one or two qualities of the commodity and there is a certain minimum for each transaction. This minimum below which transactions are not allowed is called Unit. All transactions will have to be closed during the year but, in some cases they may be carried over to the next year. Closing of such transactions is called Settlement. The time of delivery is not specified in these contracts. It is left to the choice of the seller. The contracting parties have to deposit a certain percentage of the contract price with the exchange. This is known as Margin Money. This should be deposited with the exchange whenever future contracts are made. All disputes between contracting parties are settled through arbitration by the machinery provided by the exchange.

The futures contracts differ from each contract in several respects.

CASH MARKET AND FUTURES MARKET

Cash transactions are made for the actual purchase or sale of goods. While futures contracts are entered either for speculative purpose or protecting against risks of price fluctuations.

Cash transactions may be carried on at any place but futures transactions are carried only in the ring of the commodity exchange, during the working hours.

In case of each transaction, delivery of goods is to be made either immediately or at some future date. But in case future contract, delivery of goods may be made within a specified future period but actual delivery may or may not be made.

In case of each transaction, all the details of the goods sold or purchased are known to the contracting parties. But in case of futures transactions, reference is made only to the basis grade or contract grade but the seller has the option of delivering any of the grades permitted by the exchange.

In case of each transaction, the details such as quantity, quality, time of delivery, date of delivery, mode of payment, and such other conditions are made clear. But in case of futures contracts, these details are not mentioned in each contract. Uniform details are included in the rules of the exchange.

In the case of each transaction, the contracting parties do not keep any deposit money, but in the case of futures transactions, the contracting parties are required to keep a deposit of margin money with the exchange.

The market for each transaction is also known as Physical Market or Spot Market but the market for the future transactions is known as the Exchange Market.

The future trading is the most important future of business activity in the commodity exchange, there are two types:

HEDGING &

SPECULATION


Hedging refers to the execution of two contracts simultaneously. The two markets are the cash or spot market and the futures market. It is the practice of covering the risks attaching to cash transactions in the cash market by contra-transactions in the future market. But speculation represents on attempt on the part of man to estimate the future trend of prices and proceed on that basis in such a manner that it may result in profits. Commodities may be bought at the current price in the hope of selling them at a higher price in future or vice-versa.

SPECULATION

Speculation involves trading a financial instrument involving high risk, in expectation of important returns. The object is to take maximum advantage from fluctuations in the market.
Speculators are common in the markets where price movements of securities are highly frequent and unstable. Their importance in the markets by absorbing excess risk and providing highly needed liquidity in the market by buying and selling when other investors don't perform.

HEDGING

Hedging is a method of eliminating risks arising from fluctuations in the prices. It is the practice of covering the risks attaching to transactions in the cash market by contra transaction in the future market. Thus, it involves the execution of two types of contracts of equal value in two different markets e.g. cash market and futures market. The contract entered in the cash market is for the actual delivery and transfer of ownership of specific goods either immediately or at some future date against the payment of price agreed. But the contract entered in the payment market at the same time and for the same value by the same party is either for the purchase or for the sale of the same quantity of the commodity of the contract grade, the delivery of which may not take place in future.

Thus, hedging refers to the transaction made upon the future market for the future purchase or sale of commodities. It is undertaken to offset or balance dealings in the actual goods. Therefore, the actual purchase in the cash market is off-set or balanced by a future sale i.e. by a sale in the future market and the total value of both the transactions remain the same. Prices in both the markets are expected to move in such a way that any laws suffered in one market will be off-set by an equivalent gain in the other market.

For example, a trader may purchase a commodity in the cash market, and the delivery of the goods is to be made after three months. (Find out current status) then, the trader may hedge the purchase by selling it for delivery after the same period in the future market. if the price of the commodity rises, the trader may sell in the spot market and buy in the future market. Thus the gain heard in the cash market is off-set by loss in the future market so that the trader is neither put to any laws or gain. He is able to obtain the goods at the price originally conceived for it. Similarly, an agreement to sell in the cash market may be hedged by means of a counter-agreement to buy in the future market. There are two types of hedging namely hedge sale, and hedge purchase.

When a trader buys a commodity for cash in the cash market, he may sell it at the same time in the future market an equivalent quantity of the same commodity, and of the same value so as to protect against a fall in price in future. Such a sale in the future market is called a hedge sale.

If a trader sells some goods for each in the cash market, he may at the same time, purchase in the future market an equivalent quantity of the same commodity and of the same value so as to protect himself against any rise in the price. This is known as hedge purchase.

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