Futures Trading consists of buying and selling contracts that bind parties to exchange assets at a predetermined price on a specific future date. All these contracts can pertain to different underlying assets, such as monetary instruments, securities and even commodities. The purchaser is obliged to buy, while the seller has to provide the asset at contract expiry, regardless of the existing market prices.
Key Features of Futures Contracts
- Standardisation: Futures contracts are formalised in terms of quality and quantity, simplifying trading on exchanges. This standardisation facilitates the easy transfer of contract ownership and improves liquidity within the market.
- Regulation: In India, futures trading is regulated by the Security and Exchange Board of India (SEBI). This body regulates and manages all futures trading activities. Before SEBI, the Forward Markets Commission was the main regulator of entities operating in future markets.
Participants in Futures Markets
Futures markets entices two primary types of participants:
- Hedgers: These are generally consumers or producers of commodities who employ futures contracts to handle price risk. By locking in prices, they seek to stabilise their incomes or costs against market changes.
- Speculators: These traders aim to benefit from price movements in futures contracts without planning to take delivery of the underlying investment. They usually employ leverage to strengthen potential returns. However, this also increases the risk.
Conclusion
Futures trading functions as a vital tool for cost discovery and risk control in the monetary markets. However, it bears noteworthy risks, making it critical for all the parties to comprehend their duties and also the market dynamics before immersing in trading-related activities.
