Futures are often talked about a lot, but it is difficult for a novice investor to understand what it is. Which means it's difficult to use. Let's talk about what futures are in simple words.
So, securities can be primary and secondary. Primary (for example, shares, bills and bonds) are issued by joint-stock companies, financial and other organizations. Shares give the right to part of the assets and income of the issuing company, bonds are a kind of loan, where the creditor is the holder of the security. Primary securities are released to the market by issuers, and then they are traded on the stock exchange.
Secondary securities (including futures) are derivatives of primary (for example, stocks) or other underlying assets (currencies, commodities, precious metals).
Futures- fixed-term contract for the purchase and sale of an asset. This contract specifies the terms of delivery (transfer) of the asset and its cost. An asset can be any object of exchange trading.
The futures price includes the value of the asset itself. Thus, when you buy derivative securities, you also receive the right to the asset itself. It will be transferred at the end of the contract period.
Futures can change hands an unlimited number of times. Commodity and currency forwards and futures are risk management and hedging tools.
Types of futures
Futures can be settled or delivered.
In the first case, settlement is made at the end of the futures term. In the second case, the delivery of a specific product that was discussed when drawing up the contract. In Russia, only futures for shares and other securities are deliverable. A simple example of a futures contract of this type is SBRF, in which the “commodity” is Sberbank shares. In the United States, goods are also redistributed using futures. So, if you bought oil futures, barrels of oil will be delivered to you at the end of the term.
How do futures work?
To talk about futures as simply as possible, we will use a simple example.
So, on November 22, 2017, you bought futures on Gazprom shares (GAZR) for 13,355 rubles. There are a total of 100 shares in the lot, which you will receive on December 22, that is, in a month. Thus, each share, excluding commissions, will cost you 133 rubles 55 kopecks.
The shares themselves currently cost 132 rubles 7 kopecks, a lot of 100 securities will cost 13,207. Savings - 148 rubles. So, is it unprofitable to buy futures?
Not at all. At the beginning of the year, stockholders typically receive dividends, the amount of which does not depend in any way on how long the securities have been in the hands of the current owners. This means that by the end of the year, in December, the price of shares begins to rise. It is quite possible that by December 22, the moment the contract is executed, the market price of Gazprom’s primary securities will be significantly higher than both the current quotes and the rate specified in the futures contract.
So, as part of the futures contract, you paid 133 rubles 55 kopecks for one share, and at the end of December you received securities for 136 rubles. You are a winner.
Futures are one of the types of exchange contracts that allow today (!) the seller to agree with the buyer on a price so that in the future (for example, 3 months after the conclusion of the contract), regardless of the cost, buy an asset at the old price or pay the difference in price as agreed.
The purchase is mandatory under an agreement with the exchange, regardless of the circumstances. This is why a futures contract can be beneficial to both the seller and the buyer:
- if the asset has fallen in price, it is profitable for the seller to sell it at the old (higher) price,
- if the asset, on the contrary, has risen in price, then the benefit remains on the buyer’s side - he purchases it cheaper.
Types of futures contracts
There are two types of futures:
Deliverable futures. It consists in the acquisition by the buyer of a fixed number of assets on the date of fulfillment of mutual obligations. The price per unit of a product is determined by its value on the last date of trading on the exchange when the contract was signed. If the conditions are not met by the seller of the assets, the exchange imposes a fine equivalent to the total value of the assets.
Non-deliverable futures or settlement. This type of contract involves only monetary transactions, without the delivery of the assets themselves. The cost is calculated using the formula for the difference between the contract price and the actual price of the asset on the date of the transaction. This type is used primarily to eliminate the risk of hedging the price of the underlying asset or for speculation purposes.
Futures Contract Specification
A specification refers to the documented ground rules established by an exchange to govern futures contracts. In them you can find:
- name of the contract,
- abbreviated (conditional) name,
- type (settlement contract or delivery contract),
- size (number of units of asset transferred per contract),
- validity periods,
- date of delivery,
- minimum established price fluctuations,
- minimum step cost.
Persons who signed the contract must fulfill it, otherwise the exchange will impose a fine on them.
What are futures used for?
As already mentioned, this type of transaction is used to reduce risks on the part of both the seller and the trader. Also, the last (settlement) type can be used for the purpose of fraud with money or securities.
This is a kind of transaction between two parties. One side bets money or assets that they will rise in price by a certain date, the other side bets that they will fall in price. The one whose prediction turns out to be more correct “wins” (and therefore earns). In principle, as with any other exchange contracts.
The difference between futures contracts and forward contracts
Perhaps the main difference between futures contracts and forward contracts is that the latter represent a one-time over-the-counter (!) transaction between a seller and a trader, while the former are a permanent type of contract that is traded daily on futures exchanges.
The difference between futures contracts and options
Options are not much different from futures. But there are differences. So the first type of contract, for example, only gives the right to purchase an asset on a certain date, but leaves no obligations. Futures leave an obligation to fulfill the conditions on the exchange. This is why options are considered a safer type of trading proposition on many exchanges: the buyer (trader) only risks money for the contract, and not for the entire transaction.
Where and how are futures traded in Russia and the USA?
Around the world and in Russia, futures contracts are traded mainly on special financial exchanges, but they can also be traded on regular ones. So in Russia, for example, the following large exchanges are available:
- Moscow Exchange,
- Stock Exchange of St. Petersburg,
- Moscow Futures Exchange.
There are also online platforms where you can buy this type of contract.
Global trading platforms are located primarily in the United States - this is where this type of contract is most common.
World sites:
- Chicago Comrade exchange - CTB (Chicago Mercantile Exchange - CME),
- New York Comrade exchange - NYTB (New York Mercantile Exchange - NYMEX),
- Eurex,
- Singapore Securities Exchange (SFX).
Common Trading Strategies
Every beginner and experienced trader should have their own clearly planned trading strategy. But no one can guarantee a 100% chance of success. There are always risks. So there are many factors to consider when putting together your own futures trading strategy. Such as:
- liquidity,
- volume,
- broker,
- diversification
- interest.
It is also worth thoroughly studying the market and the general situation in it to be sure of the correctness of your actions.
Trading strategies on the RTS
RTS is the largest “Russian Trading System”, with which at the moment (2016) more than 500 different companies and organizations cooperate. The strategy is called “medium-term trading on the RTS index.” It is used by most investors who do not consider themselves professional traders and cannot afford the high costs and risks. Just amateurs.
The essence of the strategy is a fairly long-term (from several months to a couple of years) investment of futures in assets of a falling or growing market (not recommended in a stable one). The risks are minimal, and the buyer does not need to sit around the clock and monitor the coding.
There are also riskier strategies. This is the purchase of short-term contracts (lasting up to 2 months) or vice versa long-term (lasting from 3 years).
Conclusion
The benefits of trading on exchanges using futures contracts are many for both parties. The risks with such a scheme are minimal, and the potential benefits are high; the main thing is to be able to assess the situation and act based on it.
And thanks to medium-term contracts, any trader can engage in this type of trading: both experienced and amateur.
Russian traders are accustomed to using such an instrument as futures in their activities. RTS, MICEX and other exchanges make it possible to do this in relation to a wide range of financial transactions. What are the features of implementing appropriate trading strategies? What are futures and how do they help traders make money?
What are futures
According to the generally accepted definition among traders, futures are financial instruments that allow the execution of futures contracts on an underlying asset, which imply an agreement between the buyer and seller on the price and timing of the transaction. In turn, other aspects of this asset, such as, for example, quantity, color, volume, etc., are specified in separate specifications of the agreement. Futures are a fairly universal financial instrument. They can be adapted to a wide variety of trading areas.
Are futures derivatives?
Yes, this is their variety. The term "derivative" is understood by many traders as a synonym for the phrase "derivative financial instrument", that is, one that is complementary to classic purchase and sale transactions. A derivative and futures are a written agreement that defines the terms of a contract for the seller and the buyer. The specificity of any derivative is that, in essence, it itself can be the subject of a purchase and sale agreement. That is, there may not be a real transfer of goods from the supplier to the buyer.
Futures history
In order to study in sufficient detail the essence of futures, it will be useful to find out how these financial instruments appeared, what are the main historical stages of their introduction into financial circulation. Some traders believe that the mechanism of the relationship between the seller and the buyer, which today fits the definition of futures, appeared long before the instrument in question appeared on the market. As often happens in economics, first a phenomenon appeared, and then a term characterizing it.
The market demanded innovation
One of the main types of goods has always been grain. If we talk about the period until the end of the 19th - beginning of the 20th century, then it was among the key items of world trade. Farmers who grew the grains shipped them to buyers by land or sea. In the autumn there was often an oversupply of goods on the grain market - farmers sought to sell their crops as quickly as possible. In turn, in the spring there could be a shortage of grain, which simply did not have time to grow, while what was not sold had time to spoil in the fall, since there was often nowhere to store it. The market somehow needed to resolve this imbalance. This is how urgent financial instruments appeared that allowed grain farmers, as well as suppliers of any other agricultural goods, to enter into contracts with buyers even before the grains had time to ripen or arrive at the point of sale.
Universal tool
Those agreements began to be called forward agreements (from the English forward - “forward”). Futures are, one might say, an adaptation of a forward contract to the peculiarities of trading on the stock exchange. Experts associate their appearance with established transaction standards in business, thanks to which appropriate agreements can be concluded regardless of the type of product being sold. As a result, futures trading has spread to transactions in which not only grain and other agricultural products are sold and purchased, but also raw materials, metals, some finished food products: sugar, coffee, etc. To a relatively new, if we talk about the history of commodity relations, financial exchanges have also adapted to the instrument.
From raw materials to stock indices
There is information that the first trading of futures in trading was carried out on the Dow Jones exchange for transactions on the index of the same name. As a result, financiers received an excellent tool - just as grain suppliers could do in the autumn. Over time, index futures became so widespread that trading volumes on them sometimes began to exceed those of classic transactions.
Futures on the foreign exchange market
The new financial instrument also began to penetrate the foreign exchange markets. One of the factors that made traders interested in using futures was, according to some experts, the abolition of the “gold standard” in the United States in 1971. Immediately after the entry into force of the new norms, quotes on the world currency market began to undergo strong fluctuations. Traders suggested that futures are the very tool that will help the market get through the phase of high volatility.
Appropriate trading mechanisms were introduced, and due to their rapid growth in popularity, experts assumed that this was exactly what the market demanded. Futures for the dollar and ruble, as noted in a number of sources, were first concluded in April 1998. On the first day of trading, the total amount of contracts exceeded 200 million rubles.
Futures in Russia
By the way, the history of Russian stock trading dates back to the time of Peter the Great. And at the beginning of the 20th century, according to some sources, 87 commodity exchanges functioned in Russia. From the late 20s until 1991, this trade institution did not function in our country. But after Russia’s transition to a free market, it became one of the key ones for the country’s economy.
When did the first futures transactions begin in Russia? There is information that the first precedents for the use of this financial instrument were recorded in 1996 on the St. Petersburg Stock Exchange. The first analytical articles began to appear, putting forward theses about the prospects of using futures in Russian trading. In the 1990s, contracts on government and municipal bonds began to be executed through this financial instrument.
Now futures are used on both major ones (RTS and MICEX). The first one even has a specialized segment for trading using this financial instrument - FORTS. Futures and options (another popular way to enter into contracts) are available on FORTS. It will be useful, by the way, to consider their differences.
How do futures differ from options?
The key criterion for distinguishing futures from options is that the owner of the former must fulfill the conditions of the agreement. In turn, the second financial instrument allows the party to the transaction not to fulfill the conditions specified in the contract. For example, do not sell shares if they have fallen in price compared to the price at the time of purchase.
Types of futures. Staged
However, let's continue our study of futures. Modern traders classify them into two types. Firstly, there are so-called staged futures. They represent a contract, at the time of execution of which the buyer undertakes to purchase, and the seller - to cede, the quantity of some asset specified in the specifications of the transaction. In this case, the futures price will be the one fixed at the most recent trading. If the contract expires and the seller does not relinquish the asset, he may face penalties.
Calculated
There are also settlement futures. Their peculiarity is that the seller and buyer pay each other in those amounts that make up the difference between the price of the asset at the time of signing and execution of the agreement, regardless of its actual delivery.
Futures specification structure
One of the key elements of futures transactions is the specification. It is a source that sets out the basic terms of the contract. The structure of the specifications for transactions of the type under consideration is usually as follows: the name of the agreement, its specific type - settlement or staged, the value of the underlying asset, timing, as well as some speculative parameters are indicated. Among the key ones is a tick, or the minimum step of a price change.
Its values depend on the specific asset. For wheat, if we talk about the main world exchanges, it is about 5 cents per ton. Knowing the volume of a futures contract, a trader can easily calculate the total price change for the entire amount of the asset. For example, if an agreement is concluded for 200 tons of wheat, then it can be calculated that the minimum price adjustment will be $10.
Oil futures
How is trading, say, futures for Brent and other types of oil carried out? Very simple. On modern commodity exchanges, this type of oil is traded, as well as two more - Light Sweet and WTI. All of them are called marker oils, since other types of oil are valued based on their correlation with the cost of the ones being traded. Contracts are executed on two main exchanges - NYMEX, in New York, and ICE, in London. The American market sells Light Sweet oil, and the English market sells two other grades. The peculiarities of black gold trading are that they are 24/7.
The generally accepted benchmark for traders on the planet is the Brent grade. This oil is a marker oil for a significant part of the world's black gold grades, including Russian Urals oil. True, as some analysts note, there are activists among traders who do not consider it advisable to hold Brent as a standard. The main reason is that it is mainly mined only in the North Sea, in Norwegian fields. Their reserves are decreasing, as a result of which, as some analysts believe, the liquidity of the product is decreasing, and the price of oil may not reflect real market trends.
Brent futures can be easily recognized by the abbreviation BRN of the London ICE exchange. The full name of the contract is Brent Crude Oil. Oil is supplied under monthly contracts. Accordingly, transactions can be concluded at intervals of a month. The maximum contract duration is 8 years. There are short-term oil futures, and there are long-term ones. The value of the corresponding contract is 1 thousand barrels. The value of 1 tick is a cent, that is, the minimum change in the contract price is $10.
How to win in oil trading using futures? Oil prices, according to some economists, depend on the state of affairs in the global economy. If a person is well versed in this topic, then he can try to enter into a contract to buy or sell oil at a set price, thus opening a long or short position, respectively. Let’s say that at an oil price of $80 per barrel, a person assumes that in 3 months the price of raw materials will rise to $120. He enters into 1 minimum contract to buy black gold at a price of $90 per barrel. Comes 3 months. Oil, as expected, rises in price to $120 per barrel, but the trader ends up with it at a price of $90. According to the terms of the exchange, he is immediately credited with the required difference of $40.
Futures and currencies
Obviously, in order to trade oil futures, a trader will need a significant investment of money. The minimum contract size, as we have already noted, is 1 thousand barrels, that is, if we take the current, not the highest prices for black gold, an investment of approximately 50 thousand dollars will be required. However, a trader has the opportunity to earn money by concluding dollar futures on the MICEX, for example. According to the terms of the exchange, the minimum contract volume is 1 thousand dollars. Tick - 10 kopecks.
For example, a person assumes that the US dollar will decrease from the current 65 rubles to 40. He opens a long position to sell one contract at a price of, say, 50 dollars, for a period of 1 month. A month later, the ruble is really strengthening its position - up to 40 units per US dollar. A person has the right to sell the amount specified in the contract specification at an exchange rate of $50 and earn 10 rubles from each unit of American currency. But if he doesn’t get the exchange rate right, he will have to fulfill his obligations to the exchange one way or another. This usually happens by placing a deposit of the required size on your trading platform account.
Similar earning mechanisms are possible when trading shares of enterprises. With a balanced, qualified analysis of the state of affairs on the market, a trader can count on excellent earnings through futures. Trading on modern exchanges is quite comfortable, transparent and protected by Russian legislation. As a rule, a trader has convenient analytical tools at his disposal, for example, a futures chart for the selected asset. The use of the corresponding one among Russian financiers has gained quite stable popularity.
Option codes
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C - code of the underlying asset, 2 characters,
P - strike price, variable number of symbols,
K - type of calculations,
M - month of execution (as well as type for option), 1 character,
Y - year of execution, 1 character,
W - weekly option sign, 1 symbol
Coding of the underlying asset (field "C")
| Group contracts |
Code basic asset (field "C") |
Code basic asset on the derivatives market |
Name of the underlying asset |
|---|---|---|---|
| Index contracts | MX | MIX | Moscow Exchange Index |
| MM | MXI | Moscow Exchange Index (mini) | |
| R.I. | RTS | RTS Index | |
| R.S. | RTSS | Blue Chip Index | |
| 4B | ALSI | FTSE/JSE Top40 Index | |
| VI | RVI | Volatility of the Russian market | |
| US | U500 | Solactive US Large Cap Index (PR) | |
| Stock contracts | A.F. | AFLT | PJSC "Aeroflot" (a.a.) |
| AL | ALRS | AK "ALROSA" (PJSC) (o.a.) | |
| CH | CHMF | PJSC "Severstal" (o.a.) | |
| FS | FEES | PJSC "FGC UES" (o.a.) | |
| GZ | GAZR | PJSC "Gazprom" (o.a.) | |
| GM | GMKR | PJSC MMC "Norilsk Nickel" (o.a.) | |
| HY | HYDR | PJSC "RusHydro" (o.a.) | |
| L.K. | LKOH | PJSC NK "LUKOIL" (o.a.) | |
| MN | MGNT | PJSC "Magnit" (o.a.) | |
| M.E. | MOEX | PJSC Moscow Exchange (o.a.) | |
| M.T. | MTSI | PJSC "MTS" (o.a.) | |
| N.M. | NLMK | PJSC "NLMK" (o.a.) | |
| N.K. | NOTK | PJSC "NOVATEK" (o.a.) | |
| RN | ROSN | PJSC NK Rosneft (o.a.) | |
| RT | RTKM | PJSC "Rostelecom" (o.a.) | |
| SP | SBPR | PJSC Sberbank (p.a.) | |
| S.R. | SBRF | PJSC Sberbank (o.a.) | |
| S.G. | SNGP | OJSC "Surgutneftegas" (p.a.) | |
| SN | SNGR | OJSC "Surgutneftegas" (o.a.) | |
| TT | TATN | PJSC Tatneft named after. V.D. Shashina (o.a.) | |
| TN | TRNF | PJSC "Transneft" (p.a.) | |
| VB | VTBR | VTB Bank (PJSC) (o.a.) | |
| MG | MAGN | PJSC "Magnitogorsk Iron and Steel Works" (o.a.) | |
| P.L. | PLZL | PJSC "Polyus" (o.a.) | |
| B.W. | GBMW | BMW AG (s.a.) | |
| DM | GDAI | Daimler AG (s.a.) | |
| D.B. | GDBK | Deutsche Bank AG (s.a.) | |
| S.M. | GSIE | Siemens AG (s.a.) | |
| V.M. | GVW3 | Volkswagen AG (p.a.) | |
| Interest contracts | OX | OF10 | "ten-year" federal loan bonds |
| O.V. | OF15 | "fifteen-year" federal loan bonds | |
| O2 | OFZ2 | "two-year" federal loan bonds | |
| O4 | OFZ4 | "four-year" federal loan bonds | |
| O6 | OFZ6 | "six-year" federal loan bonds | |
| MP | MOPR | MosPrime rate | |
| R.R. | RUON | RUONIA rate | |
| M.F. | 1MFR | RUSFAR rate | |
| Currency contracts | AU | AUDU | Australian dollar - US dollar exchange rate |
| C.Y. | C.Y. | exchange rate Chinese yuan - Russian ruble | |
| ED | ED | euro - US dollar exchange rate | |
| Eu | Eu | Euro - Russian ruble exchange rate | |
| G.U. | GBPU | pound sterling - US dollar exchange rate | |
| Si | Si | US dollar - Russian ruble exchange rate | |
| C.A. | UCAD | US dollar - Canadian dollar exchange rate | |
| CF | UCHF | US dollar - Swiss franc exchange rate | |
| J.P. | UJPY | US dollar - Japanese yen exchange rate | |
| TR | UTRY | US dollar - Turkish lira exchange rate | |
| IN | UINR | US dollar to Indian rupee exchange rate | |
| UU | UUAH | US dollar - Ukrainian hryvnia exchange rate | |
| Commodity contracts | BR | BR | BRENT oil |
| C.U. | C.U. | copper | |
| G.D. | GOLD | gold | |
| P.D. | PLD | palladium | |
| P.T. | PLT | platinum | |
| SV | SILV | silver | |
| S.A. | SUGR | raw sugar | |
| A.M. | ALMN | aluminum | |
| C.L. | C.L. | Light Sweet Crude Oil | |
| Co | Co | Grade A copper | |
| GO | GLD | gold (delivery) | |
| Nl | Nl | nickel with a purity of 99.80% (minimum) | |
| Zn | Zn | zinc | |
Encoding the strike price for options (field "P")
For options, the “strike price” field indicates the price of the underlying asset (the price of the futures contract). In turn, the price of a futures contract is the price of the package of shares included in one contract.
Coding the type of calculations (field "K")
Coding of the month of execution (field "M")
For options:
Coding of the year of execution (field "Y")
The year of execution of futures and options is coded as one digit from 0 to 9.
2 - 2002,
9 - 2009,
0 - 2010,
1 - 2011.
Coding of the weekly option attribute (field "W")
Algorithm for determining the Y, M and W fields for a weekly option:
- The Thursday of the week on which the expiration day falls is considered.
- Y is determined by the year of this Thursday
- M is determined by the month of this Thursday
- W is determined by the serial number of this Thursday in the month
Example:
A weekly call option on the RTS index with a strike price of 130,000 is expiring on Monday, December 30, 2019. Thursday this week (January 2) is a non-trading day. Therefore, the execution date was moved to the nearest previous trading day. The option will have a short code of RI130000BA0A, since the Thursday of the expiration week is January 2020, and this is the first Thursday of the month.
Futures (futures contracts, from English futures) is a derivative security (), which is an agreement establishing the conditions for the purchase or sale of a standard quantity of a certain asset at a certain date in the future, at a price established at the time of the transaction.
There is a rule according to which at least two business days must pass between the determination of the terms of a transaction and its execution, otherwise the transaction is considered immediate.
Why are futures contracts needed?
Futures have three general purposes.:
- The most important purpose of futures in general is to determine the price of an instrument.
The application value for market players can be one of two (or a combination):
- insurance against financial risks, i.e. (mainly dealt with by real suppliers or consumers of the tool)
- speculation for financial gain (done by experienced traders and investors)
What parameters does a futures have?
Any futures has two main parameters:
- execution date - i.e. a specific date on which the purchase and sale transaction must be completed
- instrument - i.e. the subject of the contract, be it goods, raw materials, securities or currency (in the case of currency, such a contract is called a forward contract)
Additionally, there are additional options:
- the exchange on which the futures are sold;
- size and unit of measurement (for example, 100 barrels);
- contract quotation unit (for example, US dollars per barrel);
- the amount of margin (i.e. the amount that is deposited when signing a future and is held to cover a loss, if any).
What is special about futures?
The buyer of a futures contract (futures) accepts an obligation to buy the asset specified in the contract at the agreed time. The seller of a futures contract undertakes to sell the asset within the agreed period.
The peculiarity of a futures contract is that when making this transaction, we are talking about a standard quantity of goods (called a contract or lot) and a specific period (called the delivery day). After the expiration of the delivery date specified by the futures contract, the next one is set, and trading begins on the new contract.
Due to the fact that the price of a futures contract is set at the time the transaction is concluded and does not change until the day the contract is executed (regardless of what the prices of the underlying asset are), futures are often used by sellers to insure their own risks when trading various instruments and goods, which is called hedging.
Futures trading
Futures contracts are especially popular among traders who profit from fluctuations in exchange prices, because have a number of advantages over regular stock trading (namely, low commissions, increased leverage, the procedure for calculating exchange rate differences, etc.). The most liquid contract on the Russian derivatives market is the futures contract.
Futures Exchange
In Russia, the derivatives market (Forts) is represented by the Moscow Exchange. The derivatives exchange trades futures on stocks, bonds, commodities, energy, currency pairs and indices.
The most liquid instruments are:
Stock futures
Index futures
- MIX (Moscow Exchange)
- RTS (Russian Trading System)
Commodity futures
Futures on currency pairs
Futures are highly liquid, volatile and quite risky, so new investors and traders should not deal with them without proper preparation.
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