Exploring changes in futures prices - Financial Market Essay

Exploring changes in earlys worths - Financial Market - Essay ExampleThis report aims at solving issues and problems related to rising worth changes and how best they can be used to best suit the needs of the foodstuff. Future contracts A succeeding(a) is contract between two parties to buy or sell a financial asset or instrument at a fixed future date and at a predetermined price as argued by Chandra, (2008). Futures argon traded in the exchange which acts as an intermediary between the two parties. The harm of future contracts argon standardized as they indicate what is to trade, when to trade and where to trade. in that respect are three types of protections constituent(a) to ease citation risk in the futures. One, the daily settlement which is is usually settled in hard currency basis is a major protection that plays a significant role in easing faith risk. Two, margin which the balance is kept in the accounts to cover several days worth of potential market to market transfers. It is necessary for every trader to understand this locution of margin in reference to credit risk. Finally, the clearing house which guarantees transactions by insures daily settlement on market gains and losses. Forward contacts are not investments as a result it costs nothing to enter into the legally binding agreement. on that point are three ways of settling or closing out a contract. First, enter in an offsetting transaction. Two, make or taking physical delivery of the underlying commodity. Finally, cash settlement is another aspect that should be elaborated to traders entering into any form of future contracts. Over the counter forward contracts are flexible but they have their own disadvantages. They are unregulated as no formal system regulates the players in the market and they are only designated for specific needs. History of future contracts The first standardized future to be listed in the exchange was the Chicago Board of Trade (CBOT) in the year 1848 in the unite States. Other major exchanges in U.S include New York Mercantile shift (1872), Chicago Mercantile Exchange (1874) and Kansas City Board of Trade (1882). In Europe futures contracts in the Exchange include London global financial futures Exchange (LIFFE) and Amsterdam, Paris, Belgium exchanges merged with LIFFE to create Euronext LIFFE. This also merged with the Lisbon Stock Exchange. Types of future contracts There are two types of futures, those that provide cash settlement and those that provide physical delivery for commodity. Commodity futures much(prenominal) as coffee require physical delivery on the agreed day. Stock index future contract is an example of a cash settlement contract. They are settled on cash on the basis of index number at the closing day. Treasury bond futures are settled by dint of physical delivery of treasury bonds. Upon maturity, they have to convert into deliverable bond. A holder of short must(prenominal) deliver 100 treasury bonds mu st mature for at least 15 years. Treasury government note futures. Treasury bills matures after 3 months and thats when the holder delivers its face value Currency futures. Most of the currencies are traded at banks on a cash basis. Usefulness of future contrac