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The simple definition of a futures contract is that it is an agreement between a buyer and a seller. The buyer has the obligation to buy either a commodity or a financial instrument by specific date at a specific price. On the other hand, the seller is obliged to sell the specified commodity or financial instrument.

By the specific date the buyer is said to be. And the seller is said to be short, most market participants, however, do not engage in the market to take on a delivery of the physical instrument, such as bushels of corn. For example, instead, they would speculate on the price movements of various contracts, similar to stock investing.

In October, a speculator bullish on soybeans purchases, one November soy beans futures for $8 and 75 cents per bushel. Each soy beans futures contract represents 5,000 bushels and would require an initial margin of 2,860. To buy that contract $2,860 will be debited from his account and held in November.

The price of soybeans has moved up to $9 per bushel. The difference of 25 cents per bushel is what the trader could realize his profit or 25 cents times 5,000 bushels, which equals $1,250.

Please note, we will explain the characteristic of a futures contract, such as the margin required and the specific terms in another course, the organized trading of these instruments started in the mid 18 hundreds. When businessmen set up forums to buy and sell agricultural products such as corn, wheat, and other commodities.

Today, the trading of futures contracts takes place and exchanges around the world. Among the largest exchanges are the Chicago mercantile exchange or CME Chicago board of trade, or see bought. And your ex in order for a contract to be listed on an exchange, it must meet certain requirements such as quantity and quality of the commodity.

The price per unit and the date and the method of delivery. In other words, their standardization. So as we know, futures are legal agreements between a buyer and a seller to buy or deliver either a commodity or a financial instrument. We also learned that these contracts would be facilitated through a futures exchange, like the CA.

Whilst originally used primarily by farmers and businessmen today, the main participants in the futures market are hedges and speculators hedges use futures, contracts to seek protection of their assets. Like an insurance policy. These assets could be financial, such as currency, bonds and stocks and nonfinancial such as gold and.

For example, a silver mining company can use futures on silver to protect itself against a potential decline in the price of the metal. A headshot could be a producer of a commodity or a financial firms, such as a bank or insurance company. We'll discuss the specifics of such hedging strategy in a later.

Uh, speculator such as a fraud trader or private investor comes to the market simply to try to make a profit from the price fluctuations. So there's little difference between someone's speculating in the stock market by buying shares at a low price and trying to sell these at a higher price. One of the main benefits of trading futures is the ability to use leverage.

Many futures traders enter the market simply to maximize their capital. The leverage in futures trading allows traders with a small capital outlay to open larger positions. For example, for around $5,000, an investor could control 1000 barrels of oil. You as a trader put down a deposit in order to trade, this is referred to as the model.

But be aware, leverage is a double-edged sword and a small movement in the wrong direction could quickly lead to losses. And let's be clear. We're not talking about the type of leverage associated with four X trading. In other words, one to 50 or one to a hundred, but more of a notional value of a country.

It's rather like buying a house that costs you 250,000 with a down payment of 20%. The margin, the value of the house is 250,000, but we only put down 50,000 and buy the house. The same analogy could be applied in trading futures. Your down-payment the margin required for buying a futures contract in light sweet oil is $4,600.

That contract has a size of 1000 barrels of oil at a market price of $30 and 50 cents per barrel. The contract has a notional value of $30,500. Therefore the leverage here could be nearly seven times in other contracts. The leverage could be higher. We'll look at this more closely in a later course where we follow a futures trade.

Please note at Saxo bank, we do not support physical delivery of futures contracts. So on or before the expiration date, we will settle any futures positions in. In most cases, futures are liquid instruments. In other words, the sheer amount of buying and selling means that the market is extremely active, giving the trader the opportunity to open and close positions, easily contracts like E-mini S and P 500 could trade more than 2 million contracts a day.

That's $200 billion of notional. As each E-mini contract has a value close to $100,000. This volume allows traders to move in and out of positions quickly and efficiently earlier, we indicated that futures are traded on exchanges around the globe. In addition to being listed on these trading venues, the contracts are also cleared centrally by clearing.

A clearing house is responsible for settling trading accounts, clearing trades. It becomes a buyer to every seller and the seller to every buyer collecting and maintaining performance bond funds, regulating delivery, and reporting trade data. So we understand that futures contracts are agreements between a buyer and seller.

The contract will specify the contract units, the delivery, the monetary value, and the last trading day among other details. The delivery month also known as an expiration month. Depends largely on the contract. Most nonfinancial futures contracts such as gold and oil have monthly expirations. Contracts on financial instruments, such as Forex stock, indices, bonds and rates have quarterly explorations.

For instance, IE minis stock index futures E S for March delivery will expire on the third Friday in March. If it were for December delivery, that contract will expire on the third Friday of December. The mini's March, 2016 contract would be identified as E S H six, where E S is the ticker symbol for the underlying H his quarterly exploration of March and six is the year that contract would also cease to trade on past the third Friday in March.

A futures contract is very much like an agreement with a mobile phone carrier. Suppose we signed a two year plan with Vodafone upon which we receive a mobile number, specific number of minutes or data, and at a specific monthly rate every month, the plan will provide us with an identical number of minutes or data until the contract.

In exchange to the service. We are obligated to pay the monthly fees to the phone company. Now, as we know a buyer and a seller of a futures contract, step into an expiring agreement to exchange an underlying position, for example, crude oil, corn bushels, or another commodity. To avoid the risk of being obligated to deliver or receive a thousand barrels of oil.

Most investors choose to simply close their futures positions prior to expiration date or the first notice date. First notice day, F N D is the day during which the corresponding futures exchange will estimate the number of traders expected to make delivery of the underlying. Those with obligation to their contract.

At the same time, the exchange will notify holders of the same contracts that they run the risk of the underlying commodity being delivered upon Saxo bank does not support physical delivery of the underlying instrument and therefore advisors, clients to take note of the exploration. And first noticed that.

If the FMD is before expiration date, investors need to close their contract the day before FND. If expiration date is before FND contracts need to be closed on the day of expiration. If futures positions are not closed before the relevant date Saxo bank will close the position on behalf of the client at the first available opportunity.

So let's summarize what you've learned. Futures are contracts and trade on exchanges around the world. When a buyer of corn futures enters into a contract, he said to belong and he's obliged to take possession of that contract. The seller is said to be short and he's obliged to deliver. The agreement stipulates that the exchange between the buyer and the seller will take place at expiration to avoid taking delivery of the underlying asset trade has closed their contracts before the expiration and thus offset their initial position futures can provide a trader with a broad spectrum of instruments and almost 24 hour trading, five days a week.

Investors trade for various reasons, such as speculation, but also hedging. The role of a clearing house is to reduce the risk of delivery failures and to ensure that proper performance bond and maintenance margins are being posted and observed.