The futures market (last part)

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Forward and futures contract (last part)

Since the Global Financial Crisis, the financial world has been in turmoil. It has been a wild ride with markets up, down, up and then down.  Investors seek ways to alleviate the risk of this volatile environment. Derivative trading is the answer.  Whether it is futures contract or option trading is the choice that we all have.

This is the final part of the futures editorials and I will commence on the options trading ...

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The futures market (part 10)

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Forward and futures contract (part 10)

Futures is for hedging and options are for speculators.

Since I have been discussing Futures in my previous editorials, I suggest let us see the difference between the hedgers and the speculators who may trade different instruments.

Hedgers may be farmers or commodity suppliers (mining companies) and may hedge using futures or forward contract by taking an offsetting position to lock in profit from the underlying asset.

Hedgers attempt to reduce the risk if the price ...

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The futures market (part 9)

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Forward and futures contract (part 9)

Both are agreement between two parties to exchange something in the future.

A forward contract is a commitment to purchase at a future date given an amount of something (commodity, FX, etc) at a price that is agreed to now.

The price (or the rate in case of interest or FX) will be fixed now for the duration of the contract. The buyer of the asset (commodity, interest rate, FX, etc) is said to be ...

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The futures market (part 8)

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The Futures market spreads (part 8)

In part 6, I wrote about Futures spreads.  How they are defined and how to trade spreads.

In part 7, I will cover how the margins are used in trading spreads.

I have spoken in an earlier editorial that with spreads we can buy a contract in one month and sell another in a different expiry (or delivery) month.

What if the price of the front month costs less than the price of the future month?  ...

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The futures market (part 7)

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The Futures market spreads margins (part 7)

In part 6, I wrote about Futures spreads.  How they are defined and to trade spreads.

In part 7, I will cover how the margins are used in trading spreads.

 

Futures Spread Trading Margins

Remember I stated in part 6 that a Futures contract spread is a strategy where you buy a particular contract and at the same time you sell another.  You may pay a margin for what you buy and receive a premium ...

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The futures market (part 6)

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The Futures market (part 6)

Futures Spreads Defined

Futures Spread Trading is a strategy of buying a particular futures contract and selling another but related contract against it all at the same time.  This strategy is also called pairs trading.  In pairs trading, one market within a sector is bought and a separate market in the same sector is simultaneously sold short.  This provides an investor with exposure to the relative performance of the two commodities with limited exposure to ...

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The futures market (part 5)

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The Futures market (part5)

The Australian stock market is made up of over 2000 stocks offering traders opportunities across a number of sectors in the futures market.  The most popular are the resources and financial sectors.

S&P/ASX 200 Resources Index

ASX offers trading opportunities to trade many of the global leading resource companies and exploration companies developing energy and mineral deposits in Australia.The S&P/ASX 200 Resources Index (XJR) consists of companies from the S&P/ASX 200 index that are classified as belonging ...

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The futures market (part 4)

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The Futures market (part4)

In the last editorial I described the main features of a futures market.  First thing first.  Futures are exchanged traded contracts.  They are standardised, so all participants know exactly the size of the contract, the delivery date, and all the information that make up the contract. 

So how much it cost to trade futures contract? Ok, First we need to remember that when we agree to buy a futures contract we call it a long ...

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The futures market (part 3)

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The Futures market (part3)

In the last editorial I said:  I will today describe the difference between hedging and speculating in the futures market.

In part 3 I will describe the main features of a futures market.  First thing first.  Futures are exchanged traded contracts.  They are standardised, so all participants know exactly the size of the contract, the delivery date, and all the information that make up the contract.

A futures contract will need to specify the following (the elements ...

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The futures market (part 2)

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The futures market (part2)

In the last editorial I said:

There are two types of futures contracts that are traded in this market.

  • Any commodity that can be seen, touched, and exchanged physically.
  • Financial contracts that deal with interest rates, foreign exchange, shares, government bonds and indices to name a few.

They are used by actual physical traders who want to hedge against price fluctuations and also provide a market for speculators to trade them.  The physical traders use the market to ...

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The futures market (part 1)

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The Futures market

I am starting a series on the Futures Market today.

We start by asking what is the Futures market all about. The market trades contracts that are considered derivatives instruments. They are called derivative instruments as their performance depends on other underlying instruments. Hence the name derivatives.  Futures are exchanged traded. There are two types of contracts that are traded in this market.

  • Any commodity that can be seen, touched, and exchanged physically.
  • Financial contracts that deal with interest ...
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