Futures contracts are almost similar to Forward contracts except that these are standardized and traded through organized exchanges. All the future contracts are handled through single clearing house or exchange and it is highly regulated by the regulatory authorities.
Characteristics of Future Contracts
Price of the futures contracts is derived from the current value of underlying assets and securities (spot price) and they are traded on the stock exchanges. The premium and discount price of the future contracts compared to the price of the underlying assets or securities are determined by the supply and demand of the particular future contracts in the capital market.
At the end of the future contract the future price will be same as the price of the underlying security and asset.
To make it better than forward contracts and remove the default risk completely, Margin amounts have to be deposited by the buyer and seller for future contracts. This margin amounts will act as guaranteed money to remove any kind of potential default risk.
Future contracts need margin amount deposit to enter and hold the future positions in the capital market.
Like Forward contracts, Future contracts are also zero sum game. Here someone’s gain is equal to others loss excluding the transaction costs and brokerage charges.
Future contracts are highly standardized.
For future contracts buyers and sellers the counter party is always the clearing house which handles all the trading activities.