This document discusses futures contracts. It defines a futures contract as a legal agreement to buy or sell an asset at a predetermined price at a specified time in the future. Futures contracts allow parties to manage the risks of price fluctuations. There are two main objectives for futures contracts - hedging to manage risk, and speculation to potentially profit from price changes. The document outlines various types of futures contracts including those for commodities, interest rates, stock indexes, and currencies.

2. INTODUCTION
Manage risk
Transaction takes time to complete
Chance of price change
Profitable deal may turn out to unprofitable
Risk due to price fluctuations
Providing protection against the risk inherent
in business world due to price fluctuations
Future contract
 Agreement to buy or sell an asset in the
future at a certain price

3. MEANING
 Futures are financial contracts obligating the buyer to
purchase an asset or the seller to sell an asset such as
physical commodity or a financial instrument.
 A future contract is a firm legal commitment
between a buyer & seller in which they agree to
exchange something for a specified money at the end
of a designated time period. Delivery is necessary &
the price is known in advance.
 The possible risk is attached to the upward &
downward changes in the actual price at the future
stipulated time.

4. DEFINITION
“Commitment to buy or sell at a
specified future settlement date & a
designated amount of commodity or a
financial asset. It legally bind the two parties
to take/make the delivery of commodity at
certain point of time in future.”

5. OBJECTIVE
1. HEDGING
 Risk is managed by taking opposite position to the
anticipated risk in future.
 Manages specified risk with a suitable offset mechanism
over time.
 Protect investment from market risk.
2. SPECULATION
 Increasing the supply of the money in the markets by
providing liquidity.
 Involves entering into buying and selling contracts
simultaneously with the intention of making profit from
changes in the prices of futures contracts

6. FEATURES
 Transferable legal agreements
 Standardized
 Underlying asset
 Exercise price
 Margin
 Clearing house
 Secondary market
 Duration & value date

7. FUTURES CONTRACT
Commodity Financial futures
futures
Interest rate Stock-index Currency
future future future

8. COMMODITY FUTURES
 Future contract in commodities like agricultural
product, metals, minerals etc…
 In organized commodity futures markets contracts
are standardized with quantities.
 This standard varies from commodity to commodity.
 In India commodity futures in agricultural products
are popular.
 Some popular commodity exchanges are :
i. London Metal Exchange(LME)- to deal gold
ii. New York Cotton Exchange(NICE)- to deal cotton
iii. International Petroleum Exchange- to deal crude oil

9. FINANCIAL FUTURES
Futures contract to buy or sell a specific
financial instrument (such as treasury bills,
certificates of deposit ,or foreign currencies ) at
a future date and at a specified price.

10. 1. INTEREST RATE FUTURES
 Futures contract by which lenders and borrowers
commit themselves to the interest rates at which
they will lend or borrow specified sums on a
specified future date.
 Firms that may suffer losses due to fluctuations in
interest rates (such as banks, brokerage house,
insurance companies) use these contract to hedge
(reduce risk ).

11. 2. STOCK INDEX FUTURES
Agreements to buy or sell a standardized
value of stock index, on a future date at a
specified price.
As an investment instrument it combines
features of security trading based on
stock indices with the features of
commodity futures trading.

12. 3. CURRENCY FUTURES
 Contract to exchange a certain amount of
a particular currency at a specific
exchange rate on a specified date.
 Currency futures are standard contracts
used by international traders to hedge
against currency risk.
 The IMM division of Chicago Mercantile
Exchange is worlds premier currency
futures market.