What are futures and how do they work. What is a futures contract in simple words? What does futures mean?

Futures or futures contract are one of the most popular instruments on the stock exchange. Futures trading occupies a significant segment of the exchange market.

The secret to the popularity of this financial instrument lies in its high liquidity and the ability to choose from a large number of investment strategies. For novice traders, this segment of exchange trading seems complex and risky, but for experienced players it offers many opportunities, including hedging risks.

Futures contract. What it is?

So what are futures? The term comes from the English word future, meaning “future”. This emphasizes the fact that the contract is concluded for the actual completion of a transaction in the future.

Futures contract is an agreement in which the current market price of a commodity or asset is fixed, but the transaction itself will be carried out on a specific date in the future

The essence of the agreement is that the parties to the transaction come to a common opinion on the price of the goods and at the same time agree to defer payments under the contract. This type of agreement is very convenient for each of the parties, since it insures against situations when some serious changes in the market situation provoke fluctuations in market prices.

The purpose of such a contract is to attempt to reduce risks, maintain planned profits and obtain a guarantee of delivery of goods. A futures contract relieves a market participant from urgently searching for someone to sell or buy a commodity from. The exchange acts as a guarantor of fulfillment of the terms of the transaction.

Example of a futures contract

A traditional example of a futures contract would be a transaction between an agricultural producer and a buyer. The farmer speculates how much he wants to sell his goods for in order to recoup the costs of cultivation and make a profit. If this amount is approximately equal to the current market value, he signs a futures contract with the buyer for the supply of agricultural products at the current price, but after a certain period of time - for example, 6-9 months, that is, as long as it takes to grow the crop.

If the price of products falls during this time (for example, the year will be fruitful and there will be an oversupply of products), the manufacturer will nevertheless be able to sell the goods at the price specified in the contract. But even in the opposite situation, if there was a bad year and product prices rose, the manufacturer will have to sell at a price that is now unprofitable, but pre-specified in the contract. The whole essence and meaning of a futures contract is to fix the price of a commodity.

The assets of a futures transaction, in addition to real goods, are stocks, bonds, currency pairs, interest rates, stock indices, etc.

Futures trading. What are the advantages?

The high popularity of futures on the stock exchange is not accidental; the advantages of this financial instrument are as follows:

1. The ability to widely diversify a trader’s securities portfolio due to access to a large number of instruments.
2. High liquidity of contracts and the ability to choose different financial strategies: risk hedging, various speculative and arbitrage operations.
3. The commission for purchasing futures is lower than on the stock market.
4. A guarantee of usually no more than 10% of the value of the underlying asset allows you to invest not the full value, but only a part, in futures contracts, but at the same time use the leverage that arises when using a futures contract.

However, the investor needs to keep in mind that the amount of the collateral may vary throughout the entire life of the contract, so it is important not to lose sight of futures quotes, monitor these indicators and close positions on time.

The futures price is also unstable. Its fluctuations allow you to track the futures chart. During the circulation period, the value constantly changes, although it depends directly on the value of the underlying asset. The situation when the futures price exceeds the value of the asset is called “contango,” while the term “backwardation” means that the futures turned out to be cheaper than the underlying asset. On the expiration date, there will no longer be such a price difference between the futures and the asset itself.

Types of futures contracts

There are two main types of futures contracts: settlement and delivery.

Futures contracts gave birth to the commodity market. The participants in the transaction agreed on a price that suited both parties and on a deferred payment. This type of transaction guaranteed both parties protection from sudden changes in market sentiment. Therefore, initially only supply contracts were in force, that is, those involving the delivery of real goods.

On the current Russian derivatives market there are delivery contracts that ensure the delivery of shares directly, but there are quite a few of them. These are futures for shares of Gazprom, Sberbank, Rosneft, for some types of currencies and options

Today, futures contracts are primarily settlement contracts and do not impose an obligation to deliver commodities. Traders prefer to trade assets that are more convenient for them (currencies, RTS index, shares, etc.). The fundamental difference between settlement futures and delivery ones is that delivery of the commodity or underlying asset does not occur on the last day of the contract. On the expiration date, profits and losses are redistributed between the parties to the contract.

The conditions for concluding a futures contract are standard, they are approved by the exchange. In addition to this scheme, personal conditions (or specifications) are prescribed for each asset, which includes the name, ticker, type of contract, size/number of units, date and place of delivery, method, minimum price step and other nuances. More detailed specifications of any futures on the Forts market can be found on the Moscow Exchange website.

The difference between futures and options is that the former oblige the seller to sell an asset, and the buyer to purchase an asset in the future at a fixed price. The guarantor of the transaction in both cases is the exchange.

Today, exchange trading experts recognize that in many ways it is futures contracts that set the pace for economic development, setting the bar for supply and demand in the market in advance.

Before a futures contract is put into circulation, the exchange determines the trading conditions for it, which are called “specifications”. This document contains information about the underlying asset, the number of units of this asset, the expiration (execution) date of the future, the cost of the minimum price step, etc. An example of such a specification is the description of the RTS Index futures.

There are two types of futures - settlement and delivery. In the case of the latter, physical delivery of the underlying asset is allowed - for example, oil or currency. It happens that such delivery is not implied and the futures are settlement. Then, at the time of its expiration, the parties to the transaction receive the difference between the contract price and the settlement price on the expiration day, multiplied by the number of available contracts. Index futures are referred to as settlement ones, since they cannot be delivered.

When trading futures contracts, the value of the position is recalculated daily in relation to the previous day and money is written off/credited to the investor’s account. That is, the difference between the purchase or sale price of a futures contract and the estimated expiration price is credited to the trader’s account daily - this is the concept of variation margin.

Futures have an expiration date, which is encoded in their name. For example, in the case of the RTS index, the name is formed as follows: RTS -<месяц исполнения>.<год исполнения>(for example, the RTS-6.14 futures will expire in June 2014).

How it works

As is clear from the history of futures contracts, one of their main purposes is insurance against financial risks (so-called hedging) - for this purpose, this instrument is used by real suppliers or consumers of the commodity that is the underlying asset. Experienced traders and investors use futures (often settled) for speculation and profit.

Futures are a fairly liquid instrument, which, however, is unstable and, accordingly, carries considerable risk for the investor.

When a futures contract that one trader has sold to another comes due, there are generally several possible outcomes. The financial balance of the parties may not change, or one of the traders may make a profit.

If the price of a financial instrument has increased, then the buyer wins, but if the price falls, then the seller celebrates success, who most likely was counting on this. If the price of the instrument does not change, then the amounts in the accounts of the participants in the transaction should not change.

Unlike an option, a futures is not a right, but an obligation on the part of the seller to sell a certain amount of the underlying asset in the future at a certain price, and for the buyer to buy it. The guarantor of the execution of the transaction is the exchange, which takes insurance deposits (collateral) from both participants - that is, you do not need to pay the entire futures price at once, only the collateral is frozen in the account. This procedure is performed on both the buyer's account and the seller's account in the transaction.

The amount of collateral (GS) for each contract is calculated by the exchange. At the same time, if at some point the funds in the investor’s account become less than the minimum acceptable level of GO, the broker sends him a request to replenish the balance, but if this does not happen, then some of the positions will be closed forcibly (margin call). To avoid such a situation, the trader must keep an amount of money in the account that is quite significantly larger than the amount of security - after all, if the price of the futures changes significantly, then his funds may not be enough to cover the position. The collateral is frozen in the merchant's account until the transaction is settled.

At the time of writing, the current value of the guarantee collateral charged to clients wishing to trade futures on the RTS index is 11,064.14 (more details). Accordingly, if a trader has 50,000 rubles in his account. That is, the trader will be able to buy only 4 such contracts. In this case, an amount of 44,256.56 rubles will be reserved. This means that only 5,743.44 rubles of free funds will remain in the account. And if the market goes against a certain number of points, then the expected loss will exceed the available funds, and a margin call will occur.

As you can see, a lot depends on the futures price, which can change under the influence of a variety of factors. Therefore, this exchange instrument is classified as risky.

Why do we need speculation and futures?

Very often, people who are not very familiar with the specifics of the stock market confuse it with Forex (although this is not particularly fair) and brand it as some kind of “scam” where speculators fleece gullible newcomers. In reality, everything is not so, and stock speculation plays an important role in the economy. Speculators buy low and sell high, but in addition to the desire to get rich, they influence the price. When the price of a stock or other exchange instrument is undervalued, a successful speculator buys - which causes the price to rise. Similarly, if an asset is overvalued, then an experienced player can make a short sale (selling securities borrowed from a broker) - such actions, on the contrary, help reduce the price.

When there are many stock market professionals who look at the stock market from different angles and use a large amount of data to analyze both the situation in the country and about a specific company, their decisions have an impact on the entire market as a whole.

In the same way, to imagine the role of futures, it is worth imagining what would happen if this financial instrument as such did not exist. Let's imagine that an oil producing company is trying to predict the required production volumes. Like any business, the company wants to achieve maximum profit with minimal risk. In this situation, you cannot simply extract as much oil as possible and sell it all. It is necessary to analyze not only the current price, but also what level it may be in the future.

At the same time, those who extract, transport and store oil are not necessarily analysts and have access to the most complete forecasts regarding the possible price of oil. Therefore, the producing company cannot know exactly how much a barrel of oil will cost in a year - $50, $60 or $120 - and produce the corresponding volume. To get a guaranteed price, the company simply sells futures to minimize risk.

On the other hand, the stock speculator from the example above may consider that the price of a particular futures is too high or low, and take appropriate action, leveling it to a fair price.

At first glance, the importance of setting a fair price in the market does not seem so necessary, but in fact it is extremely important for the fair use of society's resources. It is on the stock exchange that capital is redistributed between countries, economic sectors and enterprises on the one hand, and various groups of investors on the other. Without the stock market and the instruments with which it functions (including derivatives), it is impossible to effectively develop the economy and meet the needs of each specific member of society.

Futures are often talked about a lot, but it is difficult for a novice investor to understand what it is. Which means it's difficult to use. Let's talk about what futures are in simple words.

So, securities can be primary and secondary. Primary (for example, shares, bills and bonds) are issued by joint-stock companies, financial and other organizations. Shares give the right to part of the assets and income of the issuing company, bonds are a kind of loan, where the creditor is the holder of the security. Primary securities are released to the market by issuers, and then they are traded on the stock exchange.

Secondary securities (including futures) are derivatives of primary (for example, stocks) or other underlying assets (currencies, commodities, precious metals).

Futures- fixed-term contract for the purchase and sale of an asset. This contract specifies the terms of delivery (transfer) of the asset and its cost. An asset can be any object of exchange trading.

The futures price includes the value of the asset itself. Thus, when you buy derivative securities, you also receive the right to the asset itself. It will be transferred at the end of the contract period.

Futures can change hands an unlimited number of times. Commodity and currency forwards and futures are risk management and hedging tools.

Types of futures

Futures can be settled or delivered.

In the first case, settlement is made at the end of the futures term. In the second case, the delivery of a specific product that was discussed when drawing up the contract. In Russia, only futures for shares and other securities are deliverable. A simple example of a futures contract of this type is SBRF, in which the “commodity” is Sberbank shares. In the United States, goods are also redistributed using futures. So, if you bought oil futures, barrels of oil will be delivered to you at the end of the term.

How do futures work?

To talk about futures as simply as possible, we will use a simple example.

So, on November 22, 2017, you bought futures for Gazprom shares (GAZR) for 13,355 rubles. There are a total of 100 shares in the lot, which you will receive on December 22, that is, in a month. Thus, each share, excluding commissions, will cost you 133 rubles 55 kopecks.

The shares themselves currently cost 132 rubles 7 kopecks, a lot of 100 securities will cost 13,207. Savings - 148 rubles. So, is it unprofitable to buy futures?

Not at all. At the beginning of the year, stockholders usually receive dividends, the amount of which does not depend in any way on how long the securities have been in the hands of the current owners. This means that by the end of the year, in December, the price of shares begins to rise. It is quite possible that by December 22, the moment the contract is executed, the market price of Gazprom’s primary securities will be significantly higher than both the current quotes and the rate specified in the futures contract.

So, as part of the futures contract, you paid 133 rubles 55 kopecks for one share, and at the end of December you received securities for 136 rubles. You are a winner.

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Widerulerapplying toFORTSfuturesAndoptionsattractsattentionTothismarketmanynewpotentialparticipants. After all, it’s hereatthemThere isopportunitytradeinaccessibleon other exchangesassets: indexRTS, gold, oil, interestrates. However, these instruments are somewhat more complex than stocks and bonds, but also potentially more profitable.Let's start with something simpler - futures.

For most people, even those who have been working in the financial market for a long time, the words futures, options, derivatives are associated with something extremely distant, incomprehensible and little related to their daily activities. Meanwhile, almost everyone, one way or another, has encountered derivatives.

The simplest example: many of us are accustomed to monitoring the dynamics of the global oil market based on the prices of standard grades - Brent or WTI (Light Crude). But not everyone knows that when they talk about the rise/fall of commodity prices in London or New York, we are talking about oil futures prices.

Forwhatneededfutures

The meaning of a futures contract is extremely simple - two parties enter into a transaction (contract) on the exchange, agreeing on the purchase and sale of a certain commodity after a certain period at an agreed fixed price. Such a commodity is called the underlying asset. In this case, the main parameter of the futures contract that the parties agree on is precisely its execution price. When concluding a transaction, market participants can pursue one of two goals.

For some, the goal is to determine a mutually acceptable price at which actual delivery of the underlying asset will occur on the day the contract is executed. By agreeing on a price in advance, the parties insure themselves against possible unfavorable changes in the market price by the specified date. In this case, none of the participants seeks to make a profit from the futures transaction itself, but is interested in its execution in such a way that pre-planned indicators are met. It is obvious that, for example, manufacturing enterprises purchasing or selling raw materials and energy resources are guided by this logic when concluding futures contracts.

For another type of derivatives market participant, the goal is to make money on the movement of the price of the underlying asset during the period from the moment the transaction is concluded to its closure. A player who managed to correctly predict the price, on the day the futures contract is executed, gets the opportunity to buy or sell the underlying asset at a better price, and therefore make speculative profit. Obviously, the second party to the transaction will be forced to complete it at an unfavorable price for itself and, accordingly, will incur losses.

It is clear that in the event of an unfavorable development of events for one of the participants, he may be tempted to evade fulfillment of obligations. This is unacceptable for the more successful player, since his profit is formed precisely from the funds paid by the loser. Since at the time of concluding a futures contract both participants expect to win, they are simultaneously interested in insuring the transaction against the dishonest behavior of the party suffering losses.

The issue of counterparty risks directly faces not only speculators, but also companies that insure (hedge) against unfavorable price changes. In principle, it would be enough for representatives of a real business to seal the agreement with a strong handshake and the company seal. This bilateral over-the-counter transaction is called a forward contract. However, the greed of one of the parties may turn out to be insurmountable: why suffer a loss under the contract if your forecast did not come true and you, for example, could sell the goods at a higher price than agreed in the forward. In this case, the second party to the transaction will have to initiate lengthy legal proceedings.

Clearingcenter

The optimal solution to the problem of guarantees is to involve an independent arbitrator, whose main role is to ensure that the parties fulfill their obligations, regardless of how great the losses of one of the participants are. It is this function in the futures market that is performed by the exchange clearing center (CC). The futures contract is entered into on the exchange system, and the clearing center ensures that each trading participant fulfills its obligations on the settlement day. Acting as a guarantor of contract execution, the clearing center ensures that the successful speculator or hedger (the insuring party) receives the money earned, regardless of the behavior of the other participant in the transaction.

From a legal point of view, when making a transaction on the stock exchange, traders do not enter into a contract with each other - for each of them, the other party to the transaction is the clearing center: for the buyer, the seller and, conversely, for the seller, the buyer (see Fig. 1). In the event of claims arising in connection with the failure of the futures contract by the opposite party, the exchange player will demand compensation for lost profits from the clearing center as the central party for transactions for all market participants (there are special funds for this in the clearing center).

Clearing house arbitration also protects bidders from a theoretical stalemate in which both parties cannot fulfill their contractual obligations. De jure and de facto, when concluding a futures transaction on the exchange, a trader is not associated with a specific counterparty. The clearing center acts as the main connecting element in the market, where an equal volume of long and short positions makes it possible to depersonalize the market for each participant and guarantee the fulfillment of obligations by both parties.

In addition, it is the absence of a link to a specific counterparty that allows a market participant to exit a position by concluding an offset transaction with any player (and not just the one against whom the position was opened). For example, you had a buy futures open. To close a long position you need to sell the futures contract. If you sell it to a new participant: your obligations are canceled, and the clearing house remains short against the new player's long position. At the same time, no changes occur in the account of the participant who sold the contract at the time when you first opened the position - he remains with a short futures against the long position of the clearing center.

Warrantysecurity

Such a system of guarantees, of course, is beneficial to market participants, but is associated with great risks for the clearing center. Indeed, if the losing party refuses to pay the debt, the CC has no other way than to pay the profit to the winning trader from its own funds and begin legal proceedings against the debtor. Such a development of events is certainly not desirable, so the clearing center is forced to insure the corresponding risk even at the time of concluding the futures contract. For this purpose, the so-called guarantee security (GS) is collected from each of the trading participants at the time of purchase and sale of futures. In fact, it represents a security deposit that will be lost by the participant who refuses to pay the debt. For this reason, the margin is also often referred to as deposit margin (the third term is initial margin, since it is charged when a position is opened).

In case of default of the losing party, it is from the funds of the deposit margin that the profit will be paid to the other party to the transaction.

The guarantee performs another important function - determining the permissible volume of the transaction. Obviously, when concluding an agreement for the purchase and sale of an underlying asset in the future, no transfer of funds between counterparties occurs until the contract is executed. However, there is a need to “control” the volume of transactions so that unsecured obligations do not arise in the market. Insurance that the participants who entered into futures contracts intend to execute them, and that they have the necessary funds and assets for this, is the guarantee, which, depending on the instrument, ranges from 2 to 30% of the contract value.

Thus, having 10 thousand rubles in your account, a trading participant will not be able to speculate in stock futures worth, for example, 1 million rubles, but will actually be able to make margin transactions with a leverage of up to 1 to 6.7 (see Table 1), which significantly exceeds his investment capabilities in the stock market. However, an increase in financial leverage naturally entails a proportional increase in risks, which must be clearly understood. It should also be noted that the minimum base GO rate can be increased by the decision of the exchange, for example, if futures volatility increases.

Table 1 Warranty provision in FORTS

(minimum base size of the GO as a percentage of the value of the futures contract and the corresponding leverage)
Underlying asset	Pre-crisis parameters*		Current parameters in a crisis
Stock market section
RTS Index
Industry index for oil and gas
Industry indices for telecommunications and trade and consumer goods
Ordinary shares of OJSC Gazprom, NK LUKoil, OJSC Sebrbank of Russia
OJSC OGK-3, OJSC OGK-4, OJSC OGK-5
Ordinary shares of MMC Norilsk Nickel, OJSC NK Rosneft, OJSC Surgutneftegaz, OJSC VTB Bank
Preferred shares of Transneft OJSC, Sberbank of Russia OJSC
Ordinary shares of MTS OJSC, NOVATEK OJSC, Polyus Gold OJSC, Uralsvyazinform OJSC, RusHydro OJSC, Tatneft OJSC, Severstal OJSC, Rostelecom OJSC
Shares of companies in the electric power industry
Federal loan bonds issued OFZ-PD No. 25061
Federal loan bonds issued OFZ-PD No. 26199
Federal loan bonds issued OFZ-AD No. 46018
Federal loan bonds issued OFZ-AD No. 46020
Federal loan bonds issued OFZ-AD No. 46021
Bonds of Gazprom OJSC, FGC UES OJSC, Russian Railways OJSC, as well as bonds of the City Bonded (Internal) Loan of Moscow and Moscow Regional Internal Bonded Loans
Commodity market section
Gold (refined bullion), sugar
Silver (refined bullion), diesel, platinum (refined bullion), palladium (refined bullion)
URALS grade oil, BRENT grade oil
Money Market Section
US dollar to ruble exchange rate, euro to ruble exchange rate, euro to US dollar exchange rate
Average interbank overnight loan rate MosIBOR*,
MosPrime 3-month loan rate*

* For futures on interest rates, other methods are used to determine the size of leverage (a separate article will be devoted to these instruments in the future).

Variationalmargin, orHowis formedprofit

Managing your own risks is the prerogative of the bidder. However, the risks associated with the fulfillment of his obligations to other traders, as mentioned above, are monitored by the clearing center. It is obvious that the amount of collateral contributed by the player when concluding a futures contract is directly related to the volatility of the underlying instrument. Thus, when trading stock futures, you will have to make a security deposit of 15-20% of the contract value.

When concluding futures linked to significantly less volatile assets (for example, government bonds, the US dollar or short-term interest rates), the required amount of margin may be 2-4% of the contract value. However, the problem is that the price of each futures contract is constantly changing, just like any other exchange-traded instrument. As a result, the exchange clearing center faces the task of maintaining the collateral contributed by the transaction participants in an amount corresponding to the risk of open positions. The clearing center achieves this compliance by daily calculation of the so-called variation margin.

Variation margin is defined as the difference between the settlement price of a futures contract in the current trading session and its settlement price the day before. It is awarded to those whose position turned out to be profitable today, and is written off from the accounts of those whose forecast did not come true. With the help of this margin fund, one of the participants in the transaction extracts speculative profit even before the expiration date of the contract (and, by the way, has the right at this time to use it at his own discretion, for example, to open new positions). The other party suffers a financial loss. And if it turns out that there are not enough free funds in his account to cover the loss (the participant has guaranteed the futures contract in the amount of his entire account), the variation margin is charged from the guarantee collateral. In this case, the exchange clearing center, in order to restore the required amount of the security deposit, will require additional money (issue a margin call).

In the above example (see How the variation margin flows..) with futures for shares of MMC Norilsk Nickel, both participants entered into a deal, blocking 100% of cash in the GO for these purposes. This is a simplified and uncomfortable situation for both parties, since transferring the variation margin will oblige one of them to urgently replenish the account the very next day. For this reason, most players manage their portfolios in such a way that there is enough free cash flow, at a minimum, to compensate for random fluctuations in the variation margin.

Execution (supply) Andearlyexitfrompositions

Based on the execution method, futures are divided into two types – delivery and settlement. When executing supply contracts, each participant must have appropriate resources. The clearing center identifies pairs of buyers and sellers who must conduct transactions with each other in the underlying asset. If the buyer does not have all the necessary funds or the seller does not have a sufficient amount of the underlying asset, the clearing center has the right to fine the participant who refused to execute the futures in the amount of the collateral. This penalty goes to the other party as compensation for the fact that the contract was not performed.

For deliverable futures in FORTS, five days before their execution, the target price increases by 1.5 times to make the alternative of not taking delivery completely unprofitable compared to possible losses from price movements in an unfavorable direction. For example, for stock futures the margin increases from 15 to 22.5%. These contracts are unlikely to accumulate such a huge loss in one trading day.

Therefore, players who are not interested in actual delivery often prefer to get rid of their obligations under the contract before its completion date. To do this, it is enough to make a so-called offset transaction, within the framework of which a contract is concluded, equal in volume to the previously concluded one, but opposite to it in the direction of the position. This is how most futures market participants close their positions. For example, on the New York Mercantile Exchange (NYMEX), no more than 1% of the average volume of open positions in WTI (Light Crude) oil futures reaches delivery.

With settlement futures, for which there is no delivery of the underlying asset, everything is much simpler. They are executed through financial settlements - just like during the life of the contract, trading participants are accrued a variation margin. Therefore, under such contracts, the guarantee is not increased on the eve of execution. The only difference from the usual procedure for calculating variation margin is that the final settlement price is determined not based on the current futures price, but on the price of the cash (spot) market. For example, for futures on the RTS index - this is the average index value for the last hour of trading on the last trading day for a specific futures; for futures for gold and silver - the value of the London Fixing (London Fixing is one of the main benchmarks for the entire global precious metals market).

All stock and bond futures traded on FORTS are deliverable. Contracts for stock indexes and interest rates, which by their nature cannot be executed by delivery, are, of course, settlement. Futures for commodity assets are both settlement (for gold, silver, Urals and Brent oil) and delivery - futures for diesel fuel with delivery in Moscow, for sugar.

Pricingfutures

Futures prices follow the price of the underlying asset in the spot market. Let's consider this issue using the example of contracts for Gazprom shares (the volume of one futures contract is 100 shares). As can be seen in Fig. 2, the futures price almost always exceeds the spot price by a certain amount, which is usually called the basis. This is due to the fact that the risk-free interest rate plays a large role in the formula for calculating the fair futures price per share:

F=N*S*(1+r1) - N*div*(1+r2),

where N is the volume of the futures contract (number of shares), F is the futures price; S – spot price of the share; r1 – interest rate for the period from the date of conclusion of a transaction under a futures contract until its execution; div – amount of dividends on the underlying share; r2 – interest rate for the period from the day the register of shareholders is closed (“cut-off”) until the execution of the futures contract.

The formula is given taking into account the influence of dividend payments. However, if dividends are not paid during the trading period of the futures, then they do not need to be taken into account when determining the price. Typically, dividends are taken into account only for June contracts, but recently, due to the low dividend yield of shares of Russian issuers, the impact of these payments on the price of futures is extremely low. The role of the risk-free interest rate, on the contrary, remains very important. As you can see in the chart, the size of the basis gradually decreases as the futures expiration date approaches. This is explained by the fact that the basis depends on the interest rate and the period until the end of the contract - every day the value expression of the interest rate decreases. And by the day of execution, the prices of the futures and the underlying asset, as a rule, converge.

“Fair” prices in the futures market are set under the influence of participants conducting arbitrage operations (usually large banks and investment companies). For example, if the futures price differs from the stock price by more than the risk-free rate, arbitrageurs will sell futures contracts and buy shares in the spot market. To quickly carry out the operation, the bank will need a loan to purchase securities (it will be paid off from income from arbitrage transactions - that is why the interest rate is included in the futures price formula).

The position of the arbitrageur is neutral in relation to the direction of market movement, since it does not depend on exchange rate fluctuations of either the stock or futures. On the day the contract is executed, the bank will simply deliver the purchased shares against the futures, and then pay off the loan. The final profit of the arbitrageur will be equal to the difference between the purchase prices of shares and the sale of futures minus the interest on the loan.

If the futures are too cheap, then the bank that has the underlying asset in its portfolio has a chance to earn a risk-free profit. He just needs to sell the shares and buy futures instead. The arbitrageur will place the freed funds (the price of the sold shares minus the collateral) on the interbank lending market at a risk-free interest rate and thereby make a profit.

However, in some situations, the basis may “detach” from the interest rate and become either too high (contango) or, on the contrary, go into the negative area (backwardation - if the futures price is lower than the value of the underlying asset). Such imbalances occur when the market is expected to move strongly up or down. In such situations, the futures may outpace the underlying asset in terms of growth/decline, since the costs of operations on the derivatives market are lower than on the spot market. With a massive onslaught from only one side (either buyers or sellers), even the actions of arbitrageurs will not be enough to bring the futures price to a “fair” price.

Conclusion

Just five years ago, the instruments of the futures and options market in Russia were limited, in fact, only to contracts for shares, so the derivatives market was forced to compete for clientele with the stock market. There were two main arguments for choosing futures: increasing financial leverage and reducing associated costs. Options have many more competitive advantages: the ability to earn income during a sideways trend, volatility trading, maximum leverage effect and much more, but options also require much more preparation.

The situation with futures changed dramatically when contracts for stock indices, commodities, currencies and interest rates appeared. They have no analogues in other segments of the financial market, and trading in such instruments is interesting to a wide range of participants.

Derivatives market – a segment of the financial market in which derivatives contracts are concluded

A derivative instrument (derivative, from the English derivative) is a financial instrument whose price depends on a certain underlying asset. The best known are futures and options - futures contracts (agreements) that define the conditions for concluding a transaction with the underlying asset at a certain point in time in the future, such as price, volume, term and procedure for mutual settlements. Until the expiration date (circulation), futures and options themselves act as financial instruments that have their own price - they can be resold (assigned) to other market participants. The main exchange platform for derivatives in Russia is the Futures and Options market on the RTS (FORTS).

A futures contract (from the English future - future) is a standard exchange contract under which the parties to a transaction undertake to buy or sell an underlying asset at a certain (set by the exchange) date in the future at a price agreed upon at the time of conclusion of the contract. Typically, futures are traded on the exchange with several expiration dates, mostly tied to the middle of the last month of the quarter: September, December, March and June. However, liquidity and principal turnover are typically concentrated in contracts with the nearest expiration date (the expiration month is indicated in the futures code).

Open position (Open Interest)

When buying or selling a futures, traders have an obligation to buy or sell the underlying asset (such as a stock) at an agreed upon price, or, as the industry lingo puts it, “take a buy or sell position.” The position remains open until the contract is executed or until the trader enters into a deal opposite to this position (an Offset Deal).

Long position

A trader entering into a futures contract to buy an underlying asset (buying a futures) opens a long position. This position obliges the owner of the contract to buy an asset at an agreed price at a certain point in time (on the day the futures contract is executed).

Short position

Occurs when a futures contract is concluded to sell the underlying asset (when selling contracts), if purchase positions were not previously opened (long positions). With the help of futures, you can open a short position without having the underlying asset. A trader can: a) acquire the underlying asset shortly before the futures are executed; b) close the short futures position ahead of schedule with an offset transaction, fixing your financial result.

The essence of futures using gold as an example

In three to four months, a jeweler will need 100 troy ounces of gold to make jewelry (1 ounce = 31.10348 grams). Let's say it's August and one ounce costs $650, and the jeweler fears it will rise to $700. He does not have $65,000 available to buy precious metal in reserve. The solution is to conclude 100 futures contracts on the exchange for the purchase of gold with execution in mid-December (the volume of one contract is equal to one ounce).

Those. The jeweler will need all the necessary funds only by the end of the year. Until this date, he will only need to keep a guarantee collateral (collateral) on the exchange, the amount of which will be $6,500 - 10% of the cost of 100 futures (for more information about the guarantee collateral, see Table 1). Who will sell futures to the jeweler? This could be a stock speculator or a gold mining company that plans to sell a batch of the precious metal in December, but is afraid of falling prices. For her, this is an excellent opportunity to fix in advance the level of income from the sale of goods that have not yet been produced.

Fromstories

The principles of organizing futures trading that are used today on exchanges appeared in the USA in the 19th century. In 1848, the Chicago Board of Trade (CBOT) was founded. At first, only real goods were traded on it, and in 1851 the first futures contracts appeared. At the first stage, they were concluded on individual terms and were not unified. In 1865, the CBOT introduced standardized contracts, which were called futures. The futures specification indicated the quantity, quality, time and place of delivery of the goods.

Initially, contracts for agricultural products were traded on the futures market - it was precisely because of the seasonality of this sector of the economy that the need for contracts for future deliveries arose. Then the principle of organizing futures trading was used for other underlying assets: metals, energy resources, currencies, securities, stock indices and interest rates.

It is worth noting that agreements on future prices for goods appeared long before modern futures: they were concluded at medieval fairs in Flanders and Champagne in the 12th century. Some kind of futures existed at the beginning of the 17th century in Holland during the “tulip mania”, when entire segments of the population were obsessed with the fashion for tulips, and these flowers themselves were worth a considerable fortune. At that time, not only tulips were traded on the exchanges, but also contracts for future harvests. At the peak of this mania, which ended with an economic downturn, more tulips were sold in the form of fixed-term contracts than could grow on all the arable land in Holland.

At the beginning of the 18th century in Japan, rice coupons (cards) began to be issued and circulated on the Osaka exchange - in fact, these were the first futures contracts in history. The coupons represented buyers' rights to a crop of still-growing rice. The exchange had rules that determined the delivery time, variety and quantity of rice for each contract. It was rice futures, which were the subject of active speculation, that led to the emergence of the famous Japanese candlesticks and technical analysis.

Market adjustment. Market revaluation system (Mark-to-Market)

A system used on futures exchanges that aims to prevent large losses from occurring on open futures or options positions. Every day during a clearing session, the Clearing Center records the settlement price of futures contracts and compares it with the price of opening a position by the trading participant (if the position was opened during this trading session) or with the settlement price of the previous trading session. The difference between these prices (variation margin) is debited from the account of the participant who has a losing position open, and is credited to the account of the participant who has a profitable position. During the clearing session, simultaneously with the transfer of the variation margin, the amount of the collateral in monetary terms is also revised (by multiplying the settlement price by the GO rate as a percentage).

The market revaluation system also makes it possible to significantly simplify the procedure for calculating profit and loss on offset transactions - the clearing center does not need to store information about who, when and against whom opened a particular position. It is enough to know what positions the participants had before the start of the current trading session (within the framework of a futures contract for one underlying asset with a specific execution date, the positions of all players are taken into account at the same price - at the settlement price of the previous trading session). And for further calculations, the exchange and the CC need the prices and volumes of transactions of only one current trading day.

Leverage or Financial Leverage

Shows how many times the client’s own funds are less than the cost of the underlying asset being purchased or sold. For futures contracts, leverage is calculated as the ratio of the size of the collateral (initial margin) to the contract value.

In the case of futures, leverage arises not due to the fact that the client takes a loan from a brokerage company or bank, but due to the fact that to open a position on the exchange it is not necessary to pay 100% of the value of the underlying asset - you need to provide a collateral.

Margin call or additional collateral requirement (Margin Call)

A requirement of a brokerage company to a client or a clearing center to a clearing participant to increase funds to the minimum balance to maintain an open position.

Rollover

Transferring an open position to a contract with the next expiration month. Allows you to use futures as a tool for holding long-term positions - both long and short. With rollover, you can invest for the long term in underlying assets that are difficult to access in the cash market or are associated with higher costs (for example, gold, silver, oil).

How the variation margin flows and the collateral is reset (using the example of futures for shares of MMC Norilsk Nickel)

Let's say two trading participants entered into a futures contract for the supply of 10 shares of MMC Norilsk Nickel at a fixed price with execution in September 2007. At the time of the agreement, the futures price was 35,000 rubles. Since the guarantee for this instrument is set at 20% of its value, each trader must have 7,000 rubles in his account to participate in the transaction (see Table 1). The clearing center reserves (blocks) these funds to guarantee the fulfillment of the parties' obligations.

The next day, trading closed at 34,800 rubles. Thus, the futures price decreased, and the situation was favorable for the participant who opened a short position. A variation margin of 200 rubles, which is the difference between the settlement prices of the first and second days, is transferred to the seller, and his deposit is increased to 7,200 rubles. Since funds are debited from the futures buyer's account, his deposit is reduced to 6,800 rubles. From the point of view of the clearing center, this situation is unacceptable, since the guarantee security of each participant must be maintained in an amount of at least 20% of the current contract value, which is 6,960 rubles with a futures price of 34,800 rubles. Therefore, the clearing center will require the buyer of the futures to replenish the account in the amount of at least 160 rubles. Otherwise, his position will be forcibly closed by the broker.

On the third day, prices rise and the contract for the supply of 10 shares of MMC Norilsk Nickel costs 35,300 rubles at the end of trading. This means that the situation has changed in favor of the futures buyer, and he will be credited with a variation margin in the amount of 500 rubles or the difference between 35,300 and 34,800 rubles. Thus, the buyer’s account will have 7,300 rubles. The seller, on the contrary, will reduce his funds to 6,700 rubles, which is significantly less than the required deposit margin, which now amounts to 7,060 rubles (20% of the contract price of 35,300 rubles). The clearing center will require the seller to replenish the guarantee in the amount of at least 360 rubles, and the buyer, in turn, can dispose of available funds in the amount of 240 rubles (account funds - 7300 minus GO - 7060 rubles).

Let's assume that on the fourth day both participants decided to close their positions. The transaction price was 35,200 rubles. When it is completed, the variation margin is transferred for the last time: 100 rubles are debited from the buyer’s account and transferred to the seller. At the same time, the guarantee collateral of both participants is released, and the entire volume of remaining funds becomes free for use: they can be withdrawn from the exchange or new positions can be opened for them. The financial result of the operations for the buyer was expressed in 200 rubles of profit received in the form of variation margin (-200+500-100 or 35,200-35,000 rubles), and the seller suffered a loss in the same amount.

Table 2 Movement of funds on long and short positions in the futures for 1000 shares of MMC Norilsk Nickel

	Price futures	Warranty (20%)	Buyer				Salesman
			Account funds		Variation margin	Available funds	Account funds		Variation margin	Available funds
			before updates	after updates			before updates	after updates

Execution price of supply contracts

At the very beginning of the article, we stipulated that when concluding a futures contract, the parties agree in advance on the delivery price. From an economic point of view, this is how it turns out, but from the point of view of the movement of money in the accounts of market participants, the situation looks a little different. Let's consider the situation using the example of the same September futures for shares of MMC Norilsk Nickel. Let’s say that after two traders entered into a contract at the end of July at a price of 35,000 rubles, by mid-September the futures price rose to 40,000 rubles and at the close of the session on the last day of trading (September 14) it stopped at this level. It is at this price that the delivery will be made - the buyer will pay the seller 40,000 rubles for 10 shares of MMC Norilsk Nickel. But while holding a long position, the buyer will receive a positive variation margin in the amount of 5,000 rubles (40,000-35,000) - the clearing center will write it off from the seller’s account. Therefore, the buyer will have an increase on his deposit to compensate for the increase in the cost of delivery compared to the price of the original transaction.

When a novice trader first enters the stock exchange, his head is spinning from a wide variety of terms: futures, options, variation margin, expiration. Here the main question is not how to trade, but how to understand others in the first place. Therefore, let’s talk further about what a futures is in simple words.

Simple example

The most common example that is given when trying to explain to a person inexperienced in stock exchange terminology what futures are and what they are used for is farming. So, imagine that you are a farmer. You plan to plant a field of corn and sell the crop in the fall for, say, $1,000. The current price allows you to make such a profit. However, how the price will fluctuate in the future is unknown. Therefore, the farmer goes to the stock exchange and enters into a futures contract, which will cover all the risks. As a result, if you sell grain in the fall for only $900, the futures transaction will cover the difference and you will receive the planned amount. If you sell for 1100, then you will have to reimburse $100 in futures. However, you will still remain with your own people and risk nothing.

Thus, a futures is a transaction (contract) between two market participants, under which one undertakes to sell and the other to buy an asset. In this case, the futures contract is binding on both parties.

In more formal terms, futures contracts on the stock market are a market instrument (derivative) that is derived from an underlying asset. Moreover, the underlying asset of a futures contract can be not only farm goods, such as grain, sugar, but also oil, precious metals, currencies, and shares.

Who trades futures

Those who trade futures on the exchange can be divided into two main groups:
Hedgers who insure their risks for the future, as was the case with the farmer. This also includes shareholders. Hedging with futures contracts allows them to avoid losses in the future and receive dividends.
Traders are also speculators who make money from price fluctuations.

Forward and futures contracts

The main difference between a forward contract and a futures contract is that:

A forward contract is concluded outside the exchange once;
Futures contracts are traded on an exchange many times.

Types of futures contracts

There are different types of futures: delivery and settlement or non-deliverable.

Deliverable - from the very name it is clear that it obliges the buyer to purchase and the seller to physically deliver the product underlying the future upon the arrival of a previously agreed date. The quantity of goods is fixed in the contract specification. If the supplier does not have the goods, the exchange may impose a fine on such an unscrupulous seller.
The settlement futures contract does not provide for any delivery. Only monetary settlements occur between the two parties to the transaction. It is this type of futures that is used to hedge risks in case of unfavorable price fluctuations.

forts futures specification

Each futures has its own specification - a special document that spells out the main points of the contract. As a rule, the futures specification specifies the following parameters:

His name;
Abbreviation;
Type - calculated or delivered;
The quantity of goods (underlying asset) provided for in the contract;
The period during which the futures are valid;
The date on which the asset will need to be delivered;
The minimum step by which the price will change;
The cost of this minimal step.