FUTURE MARKETS

What are the futures markets?

The futures markets consist in the execution of contracts of purchase or sale of certain matters at a future date, agreeing in the present the price, the quantity and the expiration date. Currently these negotiations are conducted in stock markets.

They were originally born in the nineteenth century with the denomination of “forwards” or “future market”, with the aim of protecting producers of raw materials in a market characterized by times of concentration of supply (harvest) and prices very variable throughout the year, which reduced the attractiveness of the work.

The consequences of these contracts were evident. Let’s imagine that I agree to buy a kilo of corn at 50 cents with an expiration date of March 31, 2012. It is assumed that by this date I will have to pay what was agreed, but several things can happen :

  • The first is that the price is very similar to the agreed, in which case there should be no major problems.
  • The second is that the actual price at that date is lower than agreed, at which point I will have committed to pay the kilogram for an amount greater than the real one .
  • And the third is that the price is higher than agreed and therefore, once purchased, I can sell the kilo of corn in the present obtaining a profit from the operation.

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The seller also takes risks, obviously, although in any case this risk is shared by both and the breaches can come from both sides.

There is a need for great trust between the parties, because if before the expiration there is an unfavorable price evolution, it is necessary the cooperation of both parties to advance the delivery , or to take some kind of measure to reduce the impact of the variation of prices, before the agreement is broken.

All this has made the “futures markets” become “future markets”, that is, to enter organized markets that seek to guarantee the conditions of negotiation and compliance with contracts. This is done largely thanks to the so-called “compensation chambers”.

Speculation

With the example cited, it is clear how attractive the operation can be in a speculative market. Of course it is not the market itself that speculates, but investors.

In this way we find two types of figures: those who participate in the futures market, to protect themselves from risk in an activity subject to high price variations (known as “Hedgers”), and those investors who assume the risk with the perspective of obtain future benefits.

Future markets are not only made around agricultural matters but also to financial assets, minerals, currencies, etc … and the liquidation does not have to be done at maturity, in fact it is increasingly strange that this happens.

Before said date, the investor can carry out an advanced liquidation carrying out future reverse operations. In other words, selling when you are a buyer or vice versa. In this way we try to minimize the impact of price fluctuations, something that may require continuous attention to the evolution of the same.