Commodity and Futures
Future contracts are deals between market agents to buy or sell a particular good, commodity or financial instrument, for a determined price in the future. These contracts are signed and registered either at the BM&F Stock Exchange or in OTC markets. The main objective of a future contract is to hedge a buyer and mitigate his risks and exposure, to interest rates for instance, or exchange rates, sudden changes on some indexes and prices and even changes at the stock exchange itself.
Futures are powerful tools for managing risks for companies and investors, and for that reason can be considered a high-risk investment themselves. If a company’s turnover is in dollars, for instance, they must be adjusted according to the exchange rate (USD to BRL). Thereby, if the exchange rate fits better to a company in a particular level, it needs to be secured against any huge drop on dollars’ value, as it is potentially disasterous for its finances – then it closes a future contract for dollars. This way, the company makes a hedge, prevent ups and downs on the exchange rate to affect its turnover, that keeps backed by a more favorable exchange rate.
Opposingly, many speculators use futures to manipulate markets, once leveraging those contracts, chances of making money increase hugely, but so the probability of losing big does. Futures have some characteristics in common:
Standardized contracts: the contracts have a structure and rules in common, and they stipulate all characteristics for a tradeable future, like expire dates, type of liquidation, specs of goods and raw materials, quotations, etc. Such standards are quite essential, as they provide liquidity to the contracts. Given that contracts are all uniform, they can be bought or sold by any investor to anyone.
Daily settlement: daily settlement are a mechanism against risks, as they equalize all positions held by Market participants by the end of each day, at the final average pricing. If an investor holds a position in an asset and its price hikes a bit, the next day he is to be credited in a value equivalent to the upward move on prices. Otherwise he is to be charged. If prices keep falling day by day, the investor is going to lose a big money, with daily charges and deductions made at his financial position.
Guarantee margin: it is an amount deposited in cash or notes that is going to cover any possible noncompliance from the investor, during any daily settlement call. Usually, for dealing with futures in an exchange, the investor is forced to deposit such margin, in order to mitigate credit risks. The margin is set by the stock exchange, according to future contracts margins. Assets to be accepted as margin deposit include cash, gold, government or private bonds and quotas at funds.
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