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Futures (OTC)

FuturesThe principal of buying and selling for future delivery has characterised the markets for over a century and a half in physical commodities, mainly metals and staple foodstuffs. It has also been the feature of the foreign exchange markets, where prices can be agreed today for foreign currencies and other financial instruments that can be delivered in the future.

Financial Futures Markets are markets in which participants can fix the price they will pay or receive for bonds, shares and currencies and other financial products, in the future (effectively the parties thus "lock into" a known exchange rate/price). Futures prices arrived at through competitive bidding are immediately and continuously relayed around the world by wire and satellite.

Trading is made by buying or selling futures contracts which are standardised according to the quality, quantity and delivery time and location for each commodity. A
futures contract is specified with the month during which the delivery or settlement is to occur i.e. if the product is gold and delivery is in July then the price quoted is for July Gold.

There are at least
three types of participants in futures markets, the one that wants physical delivery, the hedger who wishes to protect himself against adverse movements in prices and the speculative investor.

The speculative investor has no intention of making or taking delivery of the commodity but, rather, seek to profit from a change in the price. That is, investors buy a product when they anticipate rising prices i.e buying long (and sell that product later at the higher price), or sell a product when they anticipate declining prices i.e. selling short (and then buy that product later at the lower price).

If you speculate in futures contracts and the price moves in the direction you anticipated, then you will be making profit. Conversely, if prices move in the opposite direction then losses are made. Speculators therefore are individuals and firms who seek to profit from anticipated increases or decreases in futures prices.

For those individuals who fully understand and can afford the risks that are involved, the allocation of some portion of their capital to futures trading can provide a means of achieving greater diversification and a potentially higher overall rate of return on their investments.

Copyright © 2006, International Financial Brokerage (IFB) Co.