Futures
A 'Future' is a contract to buy or sell the underlying asset for a specific price at a pre-determined time. If you buy a futures contract, it means that you promise to pay the price of the asset at a specified time. If you sell a future, you effectively make a promise to transfer the asset to the buyer of the future at a specified price at a particular time. Every futures contract has the following features:
- Buyer
- Seller
- Price
- Expiry
Some of the most popular assets on which futures contracts are available are equity stocks, indices, commodities and currency.
The difference between the price of the underlying asset in the spot market and the futures market is called 'Basis'. (As 'spot market' is a market for immediate delivery) The basis is usually negative, which means that the price of the asset in the futures market is more than the price in the spot market. This is because of the interest cost, storage cost, insurance premium etc., That is, if you buy the asset in the spot market, you will be incurring all these expenses, which are not needed if you buy a futures contract. This condition of basis being negative is called as 'Contango'.
Sometimes it is more profitable to hold the asset in physical form than in the form of futures. For eg: if you hold equity shares in your account you will receive dividends, whereas if you hold equity futures you will not be eligible for any dividend.
1 comment:
I googled and found your blog. I'd like to ask a question but please feel free to ignore it as this may not interest you. But here it goes...when a private corporation divides itself up into different class shares ie" class A 650/650, class B shareholder no.1 100/200, shareholder no. 2 100/200, class c shareholder no. 1 350/350. etc. for example, do all the shares in class A, B, and C have the same value per share?
Confused Fincially
Post a Comment