For a trader, futures represent an attractive investment vehicle. Futures offer several advantages over traditional securities such as stocks and bonds. In Singapore, deciding which futures to trade can be overwhelming, given the many choices available. However, by understanding the characteristics of each type of future, you can make an informed decision about which contracts to buy or sell.
This article will explore the three most common types of futures contracts: spot, forward and futures. We will also examine the benefits and drawbacks of each contract type so that you can make an informed decision about which type of future is right for you.
A spot future is a contract between two parties to buy or sell an asset at a specified price on a given date shortly. The asset can be anything from commodities to currencies, and the contracts are typically traded on futures exchanges. Spot futures are agreements to buy or sell an asset at its current market price, with delivery on a specified date. The critical difference between spot futures and other types of futures contracts is that spot futures settle in cash rather than in the underlying asset.
This means there is no need for the parties to take possession of the asset, making it much easier to trade. Spot futures are commonly used by traders who want to take advantage of short-term price movements. They expose the underlying asset without the need for margin or collateral.
Forward futures are contracts to buy or sell an asset at a specified price on a given date in the future. These contracts differ from traditional futures in a few key ways. First, with forward futures, the underlying asset is often not traded on an organised exchange. This means no central clearinghouse guarantees the contract and no standardisation of the contract terms. As a result, forward futures contracts are often customised to suit the needs of the parties involved. Second, forward futures contracts are not marked to market like traditional futures contracts.
This means that the contract price needs to be updated daily to reflect changes in the underlying asset price. Instead, the price is only updated when the contract expires or is terminated early. Finally, forward futures contracts often involve the physical delivery of the underlying asset rather than a cash settlement. This is because the parties involved usually have a specific need for the asset when the contract expires.
For example, a farmer might enter into a forward contract to sell his crop at a specified price to ensure that he will receive enough money to cover his costs. Forward futures can be used for various assets, commodities, foreign currencies, and equity indexes.
Futures are contracts to buy or sell an asset at a specified price on a given date in the future. Unlike spot and forward contracts, which are traded based on the underlying asset’s current price, futures are traded based on the future price of the underlying asset. This makes them an ideal tool for hedging against market fluctuations, as well as for speculation. The most common type of future contract is a commodities contract, which trades items such as oil, gold, and wheat.
However, futures contracts for stocks, bonds, and currencies exist. Futures can be traded on both exchanges and over-the-counter markets. While they offer many benefits, they also carry some risks. For example, losses can quickly mount up due to the leverage in trading futures. As a result, it is essential to understand how these contracts work before trading them.
Options are contracts that give the buyer the right, but not the obligation, to buy or sell an asset at a specified price on a given date. Options are often used to hedge against other investments, as they can protect against losses if the underlying asset price falls. However, options can also be risky, as they may expire worthless if the underlying asset price moves as anticipated. As a result, it is essential to carefully consider all risks and rewards before entering into any option contract.
There are a variety of futures products available to traders in Singapore. Each product has unique benefits and risks depending on the desired investment strategy. Before trading any future product, it is essential to understand the associated risks and rewards and how the contract works.
Additionally, ensuring that you have sufficient capital to cover any potential losses before entering into any position is essential. With this information, you can decide which futures products suit your needs.