Level2StockQuotes.com - Futures Trading Markets - What is a Futures Contract? Articles...

When you participate in futures trading you are agreeing to buy a commodity or product that a seller has not produced yet at a set commodity price...

Futures investors and speculators not interested in taking physical delivery...

Futures contracts consist of two main contracts, futures contracts that are for real delivery of a commodity and those futures contracts that are for a cash settlement.

Futures cash settlement is simply the holding of a cash settled future until expiration. At that time, there is a final margin payment, and the contract expires.

Very few futures contracts are the delivery type of contract. Most hedgers, speculators and investors in the futures markets do not have any desire to take delivery of say 500,000 pound of grain or sugar contracts they bought or sold. The majority of speculators and investors in futures markets, sell their futures prior to the delivery date as stated in the contract, resulting in a profit or loss, liquidating the futures position.

With the majority of futures investors and speculators not interested in taking physical delivery on a contract, why even offer the option to take delivery? To answer this question simply, is the fact that buyers and sellers of futures contracts that do take delivery for futures set at a certain price helps provide and accurately reflects the cash market value or price of the futures commodity when the contract expires. And with that the futures contracts price will eventually converge, this makes hedging a very effective way to protect against change and adverse change in the futures cash market price.

Futures contracts settlement price or exchange delivery settlement price EDSP - Contracts for a specific delivery month for the futures contracts shall be calculated by exchange officials and rounded to the nearest minimum price increment, as specified by the board within the list of contract details or if the price is an uneven multiple of half of the minimum price increment, then the price would be rounded off to the nearest higher number.

If currency differs from the relevant currency, the price will be converted to the relevant currency by means of the conversion rate as stated in the list of contract details prior to any rounding off to the nearest higher or lower number.

The futures trading markets primary purpose still remains the same and has been now for about fifty years. The futures trading main purpose is to provide the mechanism for managing price and risk in the market. Future contracts, buying or selling future contracts and establishing a set price now for specific commodities or items to be delivered later an individual investor or business is doing their best to provide security or insurance against adverse commodity price change. This is also known as hedging.

Remember futures contracts that are for cash settlement are contracts that settled in cash not delivery at the time the contract expires. Also a cash settlement contract when it expires the convergence in futures contract price is automatic.
What is a Futures Contract? Articles Continued...

What is a Futures Contract? Articles Continued...

For individual investors: For investors, individuals who completely understand the risks and can afford the loss involved can allocate a portion of their capital to futures trading.. This will greatly diversify your portfolio and can be a means of achieving a higher overall return on your investments. Combining futures trading with stocks and bonds is a great way to minimize the risk and become more diversified.

Futures Trading Hedgers: The principle of hedgers is simple but can be somewhat complex. In this article we attempt to clarify futures hedgers and what benefit they have. The hedgers in the futures market buy and sell futures contracts mainly to establish a price level many weeks or even months in advance.

Futures cash settlement is simply the holding of a cash settled future until expiration. At that time, there is a final margin payment, and the contract expires.
Article By: David L. - Level2StockQuotes.com