Definition
A regulated futures contract is a standardized, legally binding agreement to buy or sell a specific quantity of a commodity, stock, currency, or other financial instrument at a predetermined price at a specified future date. The contract implies two key conditions:
- Margin Account Adjustments: Parties involved must deposit or withdraw amounts from a margin account based on daily market conditions, following a process known as marking to market.
- Exchange Rules: The contracts are traded on, or subject to the regulations of, a qualified board of exchange.
Examples
- A futures contract on crude oil where the trader commits to buying 1,000 barrels at a future date at a predetermined price.
- A contract on the S&P 500 index which is settled daily based on the closing price of the index, ensuring any gains or losses are reflected in the margin account.
- Currency futures contracts where two parties agree to exchange specific amounts of currency at a set future date and rate, with daily settlements adjusting for market fluctuations.
Frequently Asked Questions
Q: What is meant by “marking to market”? A: Marking to market is an accounting practice by which the daily settlement of profits and losses is determined based on the current market values of the involved assets. In futures trading, it involves adjusting the margin accounts daily to reflect gains or losses.
Q: How do regulated futures contracts differ from forward contracts? A: Unlike regulated futures contracts, forward contracts are private agreements between parties that can be customized. Futures contracts, on the other hand, are standardized and traded on exchanges.
Q: What is a margin account? A: A margin account is a brokerage account wherein the broker lends the investor funds to purchase securities and collateralizes the loan with the security itself.
Related Terms
- Margin Account: A brokerage account in which the broker lends the investor funds to buy securities.
- Mark to the Market (Marking to Market): An accounting method that measures the fair value of accounts that can change over time, like assets and liabilities, typically for settling trades.
- Qualified Board of Exchange: An exchange that complies with regulatory requirements to facilitate the trading of standardized, regulated contracts.
- Hedging: The practice of making an investment to reduce the risk of adverse price movements in an asset, often using futures contracts.
- Derivatives: Financial instruments whose value is dependent on the value of underlying assets such as stocks, bonds, commodities, interest rates, or currencies.
Online References
Suggested Books for Further Studies
“Trading Commodities and Financial Futures: A Step-by-Step Guide to Mastering the Markets” by George Kleinman
- A comprehensive guide to understanding and trading futures contracts.
“Option Volatility and Pricing: Advanced Trading Strategies and Techniques” by Sheldon Natenberg
- Provides an in-depth understanding of derivatives including futures and options trading.
“Futures, Options, and Swaps” by Robert W. Kolb and James A. Overdahl
- An academic textbook that covers the full range of instruments in the derivatives market, including futures.
Fundamentals of Regulated Futures Contracts: Finance Basics Quiz
Thank you for deepening your understanding of regulated futures contracts. Keep striving to excel in the fascinating realm of finance and derivatives trading!