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Questions and Answers
What is a key characteristic of futures contracts?
What is a key characteristic of futures contracts?
What is the purpose of marking a futures contract to market?
What is the purpose of marking a futures contract to market?
What type of futures contract is based on a particular stock market index?
What type of futures contract is based on a particular stock market index?
What is the term for the quantity of the underlying asset being traded in a futures contract?
What is the term for the quantity of the underlying asset being traded in a futures contract?
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What is the term for a trader who sells a futures contract to speculate on a price decrease?
What is the term for a trader who sells a futures contract to speculate on a price decrease?
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What is the purpose of margining in futures trading?
What is the purpose of margining in futures trading?
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What is the term for the minimum price increment in a futures contract?
What is the term for the minimum price increment in a futures contract?
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What is the term for the last day on which a futures contract can be traded?
What is the term for the last day on which a futures contract can be traded?
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Study Notes
Futures Contracts
Definition
- A futures contract is a standardized agreement to buy or sell an underlying asset at a set price on a specific date.
- It is a derivatives instrument that derives its value from the underlying asset.
Key Characteristics
- Standardization: Futures contracts are standardized, meaning that the terms of the contract, such as the expiration date, contract size, and underlying asset, are predetermined.
- Exchange-traded: Futures contracts are traded on an exchange, such as the Chicago Mercantile Exchange (CME) or the Intercontinental Exchange (ICE).
- Mark-to-market: Futures contracts are marked-to-market, meaning that the value of the contract is adjusted daily to reflect changes in the underlying asset's price.
Types of Futures Contracts
- Commodity futures: Based on physical commodities, such as gold, oil, or agricultural products.
- Currency futures: Based on currencies, such as the euro or yen.
- Index futures: Based on a particular stock market index, such as the S&P 500.
- Interest rate futures: Based on interest rates, such as U.S. Treasury bonds.
Futures Contract Specifications
- Contract size: The quantity of the underlying asset that is being traded, e.g., 100 ounces of gold.
- Tick size: The minimum price increment, e.g., $0.10 per ounce of gold.
- Expiration date: The last day on which the contract can be traded.
- Delivery month: The month in which the underlying asset will be delivered, if the contract is not closed out before expiration.
Trading Futures Contracts
- Long position: A trader who buys a futures contract to speculate on a price increase.
- Short position: A trader who sells a futures contract to speculate on a price decrease.
- Margining: Traders must deposit a margin, a percentage of the contract value, to ensure they can meet their obligations.
- Leverage: Futures contracts offer high leverage, allowing traders to control large positions with a relatively small amount of capital.
Futures Contracts
Definition
- A futures contract is a standardized agreement to buy or sell an underlying asset at a set price on a specific date.
- It is a derivatives instrument that derives its value from the underlying asset.
Key Characteristics
- Futures contracts are standardized, with predetermined terms such as expiration date, contract size, and underlying asset.
- Futures contracts are traded on an exchange, such as the Chicago Mercantile Exchange (CME) or the Intercontinental Exchange (ICE).
- Futures contracts are marked-to-market, meaning that the value of the contract is adjusted daily to reflect changes in the underlying asset's price.
Types of Futures Contracts
- Commodity futures are based on physical commodities, such as gold, oil, or agricultural products.
- Currency futures are based on currencies, such as the euro or yen.
- Index futures are based on a particular stock market index, such as the S&P 500.
- Interest rate futures are based on interest rates, such as U.S. Treasury bonds.
Futures Contract Specifications
- Contract size refers to the quantity of the underlying asset that is being traded, e.g., 100 ounces of gold.
- Tick size is the minimum price increment, e.g., $0.10 per ounce of gold.
- Expiration date is the last day on which the contract can be traded.
- Delivery month is the month in which the underlying asset will be delivered, if the contract is not closed out before expiration.
Trading Futures Contracts
- A long position is when a trader buys a futures contract to speculate on a price increase.
- A short position is when a trader sells a futures contract to speculate on a price decrease.
- Margining involves depositing a margin, a percentage of the contract value, to ensure traders can meet their obligations.
- Futures contracts offer high leverage, allowing traders to control large positions with a relatively small amount of capital.
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Description
Learn about futures contracts, a standardized agreement to buy or sell an underlying asset at a set price on a specific date. Understand their key characteristics, including standardization and exchange-traded nature.
