Futures

In finance, futures pertain to the standardized, exchange-traded contracts that require the timely delivery of particular commodity, bond, currency or stock index at a stated price. Parties in futures are obliged to buy that product at a specified future date. The future date is also known as delivery date or final settlement date. Futures price, on the other hand, is the pre-set price of the good or commodity, while the price of the underlying asset on the deliver date is referred to as settlement price.

Futures work with the seller in delivering the commodity to the buyer, or in cases of cash-settled future, money being transferred from the futures traders to the ones who gained profit. Future contracts or futures are exchange traded derivatives, with the exchange clearinghouse acting as counter play of all the contracts, in charge of setting margin requirements and providing mechanism for settlement.

To reduce the risks involve in futures its liquidity is highly standardized, specifying things like underlying asset or instrument, type of settlement, amount and units, the currency in which the future contract quoted, the delivery month, the grade of deliverable and many others.

There is also margin or performance bond that is usually 5%-15% of the value of the contract. Margins can either be clearing margin, customer margin, and initial margin. Clearing margin are safeguards installed to ensure that those involved in the transaction do what is stated in the open futures and options contracts. Customer margins or performance bond margins guarantees the fulfillment of contract obligations. Finally, initial margins features the money required in the opening of derivates position. For some transactions, expiry is on the third Friday of trading months. It is expected that futures contact be settled before or during the expiry period. Expiry is the time when the final price of futures is identified.