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What are futures?

Futures are also exchange-tradedderivatives. Futures represent a tradeagreement, to buy or sell an asset foran agreed price, which will be takenplace in future. The entire futurescontract has a final trading date, whichis specified only by the exchange.

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What are futures?Example: The farmerwould agree with the dealer on a priceto deliver to him 5,000 bushels ofwheat at the end of June. The bargainsuited both parties. The farmer knewhow much he would be paid for hiswheat, and the dealer knew his costs inadvance. The two parties may haveexchanged a written contract to thiseffect and even a small amount ofmoney representing a "guarantee."

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What is a derivative?

A de r iv a t iv e is a financial instrument -or more simply, an agreement betweentwo people or two parties - that has avalue determined by the price of

something else

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What is a derivative?

Example:

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Derivatives are used by investors to:

o provide leverage or gearing, such thata small movement in the underlyingvalue can cause a large difference inthe value of the derivative

o speculate and to make a profit if thevalue of the underlying asset movesthe way they expect.

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Derivatives are used by investors to:

o hedge or mitigate risk in the underlying,by entering into a derivative contractwhose value moves in the oppositedirection to their underlying position andcancels part or all of it out.

o obtain exposure to underlying where it isnot possible to trade in the underlying

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o Hedging:

o Hedging is a technique that attempts toreduce risk. In this respect, derivativescan be considered a form of insurance.

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S p e cu l a t i o n a n d a r b i t r a g e :

o Derivatives can be used to acquire risk,rather than to insure or hedge againstrisk.

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O v e r - t h e - c o u n t e r ( O T C ) d e r i v a t i v e s arecontracts that are traded (and privatelynegotiated) directly between two parties,without going through an exchange orother intermediary.

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o Co m m o n d e r i v a t i v e c o n t r a c t t y p e s :

1.Futures/Forwards are contracts to buyor sell an asset on or before a future dateat a price specified today.

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o Co m m o n d e r i v a t i v e c o n t r a ct t y p e s :

2. Options are contracts that give theowner the right, but not the obligation, tobuy (in the case of a call option) or sell (inthe case of a put option) an asset.

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o Co m m o n d e r i v a t i v e c o n t r a c t t y p e s :

3. Swaps are contracts to exchange cash(flows) on or before a specified futuredate based on the underlying value ofcurrencies/exchange rates, bonds/interestrates, commodities, stocks or otherassets.

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A put option (usually just called a "put")is a financial contract between twoparties, the writer (seller) and the buyerof the option. The buyer acquires a shortposition by purchasing the right to sellthe underlying instrument to the seller ofthe option for a specified price (the strikeprice) during a specified period of time.

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A call option , often it is simply labeled a"call", is a financial contract between twoparties, the buyer and the seller of thistype of option.The buyer of the call optionhas the right, but not the obligation to buyan agreed quantity of aparticular commodity or financialinstrument(the underlying) from the sellerof the option at a certain time (theexpiration date) for a certain price.

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o Co m m o n d e r i v a t i v e c o n t r a ct t y p e s :

3. Swaps are contracts to exchange cash(flows) on or before a specified futuredate based on the underlying value ofcurrencies/exchange rates, bonds/interestrates, commodities, stocks or otherassets.

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o Terms:

o A long position in a security, such asa stock or a bond, or equivalently t o b elong in a security, means the holder ofthe position owns the security and willprofit if the price of the security goes up.Going long is the more conventionalpractice of investing and is contrastedwith going short.

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o Terms:

o Short sell ing (also knownas shorting or going short ) is thepractice of selling assets,usually securities, that have beenborrowed from a third party (usuallya broker) with the intention of buyingidentical assets back at a later date toreturn to the lender.

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