FUTURES

A Future contract is an agreement between two parties to buy or sell an asset at a certain time in future at a certain price. Future contracts are special type of forward contracts in the sense that the former are standardized exchange-traded contracts. In other words A future contract is one in which one party agrees to buy from/ sell to the other party a specified asset at price agreed at the time of contract and payable on future date. The agreed price is known as strike price. The underlying asset can be commodity, currency debt, or equity. The Futures are usually performed by payment of difference between strike price and market price on fixed future date and not by the physical delivery and payment in full on that date. Features Of Future Contract • An organized exchange. • Unlike the Forwards, the Future contracts are standardized contracts and are traded on stock exchange • It is standardized contract with standard underlying instruments, a standard quantity and quality of the underlying instrument that can be delivered and standard time for such settlement transactions. • Existence of a regulatory authority. • Margin requirements and daily settlement to act as a safeguard. • Leveraged positions--only margin required. • Trading in either direction--short/long • Index trading. • Hedging/Arbitrage opportunity.