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What are Futures Contracts?

Futures Contracts are a type of exchange traded derivative security that obligates buyers to purchase, or sellers to sell, an asset at a predetermined future date and price. They have standardised details, such as price, quantity and delivery date, which enables them to be traded on futures exchanges. Most futures contracts are settled in cash. Gleneagle Securities offers Futures trading through the SaxoTrader platform. Futures Contracts can be used either to hedge or to speculate on the price movement of the underlying asset. Additionally, they only require an initial margin to enter into and can be leveraged to gain greater exposure to price movements.

How do Futures Contracts work?

Trading Futures Contracts gives you exposure to price movements of underlying securities without having to own them. You may profit from underlying security

price rises by taking a long position in a Futures Contract. Alternatively, you may also profit from a price fall by taking a short position.

 

When trading Futures Contract:


Open position by placing an Initial Margin, that serves as collateral. Buy a Futures Contract to open a long position or sell a Futures Contract to open a short position. Profit and losses are calculated on a daily basis, with differences transferred between your account and a clearing house. Sell the Futures Contract to close a long position or buy the Futures Contract to close a short position.

Characteristics of Futures Contracts


Range of delivery month periods that are chosen by the Futures exchange to meet the needs of market participants. Ultimately, this means Futures Contracts have an expiry date. Standardised contract size which can be large and require more capital to fund. For example, Treasury bond futures may have a face value of $100,000. Delivery arrangements which are specified by the exchange or the seller of the contract. Note that Veridian does not support physical delivery of contracts and will cash settle a client’s positions on their behalf at or near the contract expiry date.

Benefits

Exchang Traded

Futures Contracts are exchange traded derivatives, benefiting from greater liquidity and transparency than OTC counterparts. Veridian provides clients with access to 21 of the largest exchanges around the world.

Long and Short

Futures Contracts offer the ability to take long or short positions in underlying assets, allowing traders to benefit from potential profit opportunities in both rising and falling markets.

Hedge Positions

Use Futures Contracts to hedge your open positions on the market. For example, if you hold a long position in a commodity, open a short position in a Futures Contract for the underlying asset to protect against negative movements.

Risks

Basis Risk

Basis is the difference between the spot price and the futures price, and it fluctuates over time. Short Futures positions are weakened if basis weakens, where as long Futures positions a weakened if basis strengthens.

Unlimited Liability

Futures Contracts are subject to unlimited liability, where losses can accumulate beyond your initially committed capital (Initial Margin) if the price of the underlying asset continues to move against your position.

Margin Calls

If the market moves against you or margins increase you may have to provide additional funds at short notice. If you do not, your position may be closed and you will be liable for any resulting loss.