Futures Contracts in the Forex Marketadmin 2 October 2021
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Due to the large size of the Forex market, trading methods are different. In some cases, traders buy certain goods or assets in advance due to uncertainty about market fluctuations. On the opposite side, some traders want to take advantage of market fluctuations. Therefore, both groups buy or sell assets at a specific time in the future. In this article, we try to introduce futures contracts and their features.
Futures contracts promise to buy or sell specific assets or securities at a predetermined price in the future. Therefore, the buyer of the futures contract is obligated to purchase and receive a particular asset at the due time. The seller of the futures contract also assures to provide and deliver the original asset on the expiration date. Investors and speculators make the most profit from price changes in this market. These contracts also involve more rules than OTC and CFD or forward contracts.
History of futures contracts
The origins of this type of contract date back to 1848 in the United States. At that time, wheat farmers began to make contracts to receive their money in the future. In this way, the farmer would be sure to receive his money in the future, and the buyer would be informed of the product’s price. Before the due date, if the buyer changes his mind for any reason, he would assign his contract to another person.
The seller could also transfer the delivery to another person if he did not want to deliver at a particular time. This method became more cohesive gradually and has appeared with a modern form in the financial markets today. Today less than 2% of concluded contracts involve the actual delivery of the main asset. Because buyers usually sell their contracts before the delivery date.
Different types of futures contracts
Since certain assets are traded in futures contracts, therefore these contracts are divided into several types. The most common ones in the Forex market include currency pairs, stock indices and commodities.
Forex futures trading
This type indicates the price at which you will be able to buy your desired currency in the future using another currency. You must also consider future currency liquidity before starting to trade. The main reason is that major currency pairs offer more daily trading volume than minor currency pairs.
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Index futures trades are used to buy or sell the stock market index at a specific price settled on the expiration date. Since the stock index consists of a group of stocks, in this case, physical assets do not support the market. Therefore, most trades are made through futures contracts and CFDs. Index futures are mainly used to cover risk or speculation about market movements.
Oil futures enable market participants to specify future oil prices. Although no one knows the exact price in the market, we can predict the closest possible level to the actual price. Oil contracts are settled every month due to instability in the oil markets, unlike some other commodities that are settled only a few times a year. The short distance between each settlement enables market participants to predict oil prices better.
Features of futures contracts
The main feature of futures contracts is the options it offers to traders. This type of contract helps buyers and sellers trade at a predetermined price to which they have already agreed. In addition, by using it, traders will be sure that they will achieve a suitable profit level. For example, farmers who are worried about lowering the price of their wheat can ensure the sale of their products at a specific price by concluding a future contract. These contracts have other features such as:
- Being standard: Futures contracts have principles and standards that prevent traders from adding more money or time into the contract.
- Covering risk: The advantage of this contract over similar contracts is the low level of risk in trades. Therefore, people buy and sell with more confidence in maintaining their capital.
- Liquidity capability and flexibility: As we mentioned earlier, the commodity futures market does not require commodities or stocks. So, people can sell their contracts. Such features make this type of contract highly liquid.
- Using leverage: Using trading leverage in futures contracts can be as risky as it can be profitable for traders.
The difference between futures contracts and forward contracts
Forward contracts are the ones that the buyer and seller can negotiate their terms. Both parties to the contract will trade the underlying asset at an agreed price at a specified time in the future. However, in a futures contract, there is an agreement between the parties to buy or sell the underlying asset at a specified rate and time in the future, and they cannot negotiate about anything later.
Futures contracts have specific standards that reduce investment risk. Since this market provides an excellent platform to make a profit, investors always pay attention to it. People in this market can start trading with small capital and even make a profit from it.
Even traders looking to make a profit from market fluctuations can use this method. To be able to remain active in this market with the least amount of risk, there is a vital need for training and learning. By visiting the DeltaFX Broker website, you will be able to benefit from the necessary training.