FUTURE CONTRACT AND ITS FEATURES

Q.3: Explain Future Contracts along with its features.                                                OR

      Write note on Future Contracts.                                                                               OR

              Distinguish between Forwards and Futures.

Ans. A) FUTURE CONTRACTS :-

A future contract is an agreement between two parties to buy or sell an asset at a certain time in future, at a certain price. Future contracts are standardised arid stock exchange traded. A future contract may be offset prior to maturity by entering into an equal and opposite transaction.

B)        FEATURES OF FUTURE CONTRACT :-

1)        Exchange Traded :-

Future Contracts are generally traded on an exchange. The exchanges provide a mechanism of guarantee to honour the contract. So there is secondary market for futures.

2)        Standardised :-

Future contracts are highly standardised and legally enforceable. There is lack of flexibility.

3)        Types Of Future :-

Future contracts can be classified into two:-

a)        Commodity future in which underlying asset is a commodity

b)        Financial future in which the underlying asset is a security or bond.

4)        Transparency :-

The contracts enjoy a fair degree of transparency. The terms and conditions are published by exchanges.

5)        Down Payment :-

In future contracts, the contracting parties have to deposit a certain percentage of contract price called as Margin Money with the exchange. It acts as a collateral to support the contract.

6)        Delivery Of Asset

In future contract the parties only exchange the difference between the future price and the spot price prevailing on the date of maturity.

7)        Settlement :-

A future contract is always settled daily, irrespective of maturity date. It is market to market on a daily basis. The difference between future price and spot price on a day constitutes either profit or loss.