FUTURE EXCHANGE OR MARKET

FUTURE EXCHANGE / MARKET 

A future exchange or market is a central financial exchange where people can trade standerized "Future contracts".

                   This type of contracts fall into the category of "derivaties". Such instruments are priced according to the movement of the underlying assest. This is known as derivatives because the value of these instruments is derived from another asset class.

BASIC FUNDAMENTAL OF FUTURE MARKET

• Long position or Short position :- In finance a long position in a security such as stock or bond or commodity means the holder of the position owns the security and will profit if the price of the security goes up.

                            In contrast, a short position in a future contract or similer security means the holder of the position will profit if the price goes down.

• FORWARD CONTRACTS :- A forward contract is a non-standarized contract between two parties to buy or sell an asset at a specified future time at a price agreed upon today.

                 The party agreeing to  buy the underlying assets in the future assumes a "long position" and selling party assumes "short position".

1. The price agreed upon is called the delivery price , which is equal to the forward price at the time the contract is entered.
2. It can be used to hedge risk to allow a party to take advantage of a quality o the underlying instrument which is time sensitive.
3. It mainly deals with commodity and Exchage rates.

• STANDARIZATION :- Standardization is the process of developing and implementing technical standards.

                       For ex:- There is delivery grade standard for commodity to follow in each future contracts.

• FUTURE CONTRACTS :- A future contracts has general features same as forward contracts except it is a standerdized contract and negotiated at a "future exchange"  which acts as an intermediary between the two parties.

                             The earliest Future Contracts were used for rice in 17th century japan.   After that in 1840, chicago emerged as the hub for this type of contracts.

                 It is different from Forward Contracts in given ways:-

1. It is a standard contract.
2. The underlying assests in contract is not only commodities. It may be currency , bonds, stocks or intangible assets like stock indexs & Interest rates. 

• The purpose of the Future Exchanges institution is to act as intermediary and minimize the risk of default by either party.