What Do Futures Markets Provide?
Hedging
Futures markets provide opportunity to hedge against price changes that may occur in the cash markets where the underlying asset is traded for investors.
Effective Price Formation
In financial markets, the existence of a futures market that operates effectively alongside the spot market enables the price formation mechanism to work more effectively. The price formed in the cash market will be much more effective than in the case of only the spot market since the future predictions regarding the price of the underlying asset come into play due to the existence of a futures market. Futures markets have a significant effect on price formation that it has assumed the role of a market where cash prices are also formed in some commodity markets.
High Liquidity
Since futures markets allow investing in the same amount of underlying assets with a lower amount of investment compared to cash markets, it allows both markets to be more liquid, as it will provide the opportunity to invest in a wider audience.
Leverage Effect
Futures markets provide opportunity to take large positions with a small amount of investment and to earn high profits with the help of leverage effect for investors. However, the leverage effect also includes the risk of losing much faster and larger amounts compared to the cash market.
Portfolio Diversification
Futures markets offer different options in terms of portfolio diversification and therefore in terms of risk spread to portfolio managers.
Synthetic Positions
Synthetic positions with yield graphs similar to financial instruments traded in cash markets can be created by using financial instruments traded in futures markets. Futures markets help to increase the efficiency in the markets and reduce the price fluctuations (volatility) in the spot market due to this feature.
Factors which determine the price of futures contracts are:
- Underlying asset’s cash price
- Interest rate
- Dividend yield
- Days to Expiry
| Futures | Forward |
| Traded on an exchange | Traded on over the counter market (Privately negotiated) |
| Standardized contract with essential elements | Customized between two parties |
| Profit/Loss is calculated on a daily basis (marking to market) | Profit/Loss is calculated on expiry date |
| Position is usually closed before expiry date | Position is closed on expiry date |
| Collateral depositing is required | Collateral depositing is not required |
| No or low counterparty risk, since payment is guaranteed by the exchange clearing house | Credit default risk, since there is no clearing house |
Legal Warning: "The Futures Calculator calculates the theoretical price at maturity by adding the carrying cost according to the risk-free interest rate to the spot price of the underlying asset. The values to be calculated are purely theoretical and are based on the assumptions of the model and the values entered by the investors. Although utmost care has been taken in the creation of the calculator, Borsa İstanbul cannot be held legally responsible for the errors that may occur in the calculation results or the investment decisions to be taken based on the results obtained using the calculator, and the results thereof."