Page 51 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives Mahesh Kumar Sarva, Lovely Professional University

Notes Unit 4: Introduction to Future Contracts

CONTENTS
Objectives
Introduction

4.1 Futures Contracts
4.1.1 Nature of Futures Contracts
4.1.2 Characteristics of Futures Contracts
4.1.3 Standardisation of Futures Contracts
4.1.4 Categories of Futures Contracts
4.2 Distinction between Futures and Forwards Contracts
4.3 Futures Terminology
4.4 Types of Future Contracts
4.4.1 Stock Index Futures
4.4.2 Commodity Futures
4.4.3 Currency Futures
4.5 Summary
4.6 Keywords

4.7 Review Questions
4.8 Further Readings

Objectives

After studying this unit, you should be able to:
 State the meaning and concept of futures contracts;
 Discuss the nature, characteristics, and standardisation of futures contracts;
 Identify the distinction between Futures and Forwards Contracts;
 Explain the futures terminology;
 Explain the types of Future Contracts.

Introduction

In the previous unit, we studied about the concept of forward contracts and the terminologies
used in it. We also discussed about the various features, classification, benefits and limitations of
forward contracts. This unit will help you to understand the concept of future contracts and the
terminologies used in it. We will also identify the distinction between futures and forwards
contracts.

A futures contract is a type of derivative instrument, or financial contract, in which two parties
agree to transact a set of financial instruments or physical commodities for future delivery at a
particular price. If you buy a future contract, you are basically agreeing to buy something that a
seller has not yet produced for a set price. But participating in the futures market does not
necessarily mean that you will be responsible for receiving or delivering large inventories of
physical commodities remember, buyers and sellers in the futures market primarily enter into

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