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What is the futures market?

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What is the futures market?

In the Futures market,  contracts for certain standardized assets or merchandise (size and price) are negotiated. When starting a contract, the agreed price is known in advance to carry out an exchange at a certain future date (contract expiration date). The price of the futures contract is derived from a reference asset or an underlying asset, in this market there are many assets or raw materials, such as currencies, stocks, stock indices, gold, oil, soybeans, rice.

How do you access the futures market?


To access the Futures market  we will have to have an account open with a financial intermediary (broker) such as a securities company, a securities agency, which will give us access to said market through a specific account that allows trading in said market. 

Once we have the account that allows us to operate with futures open, we will have to have enough money to cover the guarantees required by the Counterparty Chamber and by the Broker or financial intermediary. Now we would only have to access the application that allows us to contract futures and buy or sell depending on our expectations or type of operation that we are going to carry out.

Characteristics of the futures markets


Futures markets  have grown a lot in recent years, largely due to the advantages they offer. With futures contracts, different types of  operations can be carried out,  among which speculation, portfolio coverage or price arbitrage can be highlighted.

Leverage effect: The clearing house and the Broker only require a percentage of the face value of the contract to take into account.Low commissions: Futures contracts have low commissions.Liquidity: There is a market maker that guarantees a minimum of supply and demand to guarantee price formation.Diversification: It allows us to access a large number of financial products.Risk: It allows us to reduce the risk of our operations, since we can position ourselves both upward and downward, reducing and even neutralizing portfolio risk. Regulated market: In the futures market there is a clearing house, which guarantees the daily settlement of positions between buyers and sellers. Settlement: Futures contracts for differences (the most common) are settled daily, making a daily profit and loss balance.Clearing House: Guarantees that there is no counterparty risk. Those who in the day have won by the price difference will receive an income from the losing accounts for the price difference, for this the clearinghouse is in charge.

Future market risks


The main risk of speculating in the futures market is the risk derived from financial leverage, since we only require guarantees regarding the value of the nominal contract. This means that if the nominal value of a certain contract equals 10,000 in the account, it will only be necessary for us to have the guarantees that depending on the underlying asset and its volatility can range between approximately 10-20%. Therefore, this leverage effect can generate profits and losses very quickly, we are also multiplying the variability of our account.

The profits and losses in our account depend on the variation of the nominal contract, not on the guarantees that we have deposited. Continuing with the previous example, if a nominal contract equals 10,000 and we are required to guarantee 10%, in our account, assuming that we only have the minimum required, that is, 1,000, a variation of 1% of the underlying will cause our futures account fluctuates 10% due to the leverage effect.

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