What is future contracts in stock market?
Future contracts have two types of settlement the market to market settlement which happens on a continuous basis at the end of each day and the final settlement which happens of the last trading day of the future contract.
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A future contract provide an opportunity to commit now to purchase or sale and underlying asset at a specified price with delivery and payment delayed until the settlement date.
A future contract can be either bought or sold.The buyer of a future contract has a long position and commit to buying the underlying asset or security at the specified price and date. No money changes hands off from except for the posting of initial margin.the sila of a future contract has a short position and commit to sell the underlying asset or security at the specified price and date.the fact that the future price is negotiated now but delivery and payment are delayed until the settlement date creates and opportunity cost for the seller in receiving payment. As a result the negotiated price for a future delivery of the asset differ from the current cash prize by an amount that reflects the cost of waiting to get paid.
Market to market future
terror 2 parity buy and sell agreement without margin requirement for a market to market future is simply forward contract which was a common practice for trading agricultural commodity long before the establishment of formal future exchange in the 20th century.the more formal future contract contain many of same element has a forwarded agreement but gains or losses that accurate as the price of the underlying asset fluctuates are realised on a day-to-day basis.the total accumulated gain or loss is the same for our future contract as for a forward agreement but is realised or cash is transferred on a daily basis instead of on the final settlement date.
Futures contracts are required the posting of initial margin for your performance bond with a broker to initiate the trade.the minimum size of the initial margin varies for different future contracts but usually amount to between 2% and 10% of the national contract value as set by the exchange where the contacts is traded.contacts on more volatile securities or indices generally required higher percentage margin then contracts on less volatile securities or indices and are occasionally adjust by the exchange in response to market condition.
Difference between forward agreements and future contracts
There is is the difference between future contracts and forwarded agreements is that future contracts have standard size provisions specifying mutuality date and contract size so they can be traded on organised exchange.most actively traded market it use future contract all throw a substantial forward Market for foreign exchange exist through the banking system.if interest rate are constants and the term structure is flat the two will theoretically be priced the same. These interest rate conditions are not strictly meet in in fact is the difference in price between a future contract and forward agreement is usually small.
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