What Do Futures Markets Provide?
Hedging
Futures markets provide investors with the opportunity to protect against price changes that may occur in spot markets where the underlying asset is traded.
Effective Price Formation
Existence of an active market in the financial markets in addition to the spot market enables the price formation mechanism to work more effectively. Since future predictions regarding the underlying asset price come into play due to the presence of a futures market, the price formed in the spot market will be much more effective than the situation in the spot market alone. Futures markets are so effective in price formation that they have assumed a market role in some commodity markets, where spot prices also occur.
High Liquidity
It allows both markets to be more liquid, as futures markets allow to invest on the same amount of underlying assets with lower consistent investment compared to spot markets, as they will allow them to invest in larger audiences.
Leverage Effect
Futures markets offer investors the opportunity to take a large amount of position with a small amount of investment and to make high gains with the help of leverage. However, the leverage effect also involves the risk of damaging the investor much faster and much more than the spot market.
Portfolio Diversification
Futures markets offer portfolio managers different options in terms of portfolio diversification and thus spread of risk
Synthetic Positions
By using products traded in futures markets, synthetic positions with a return graphic similar to those traded in spot markets can be created. Due to this feature, futures markets help to increase efficiency in the markets and reduce volatility in the spot market.
Factors Determining the Price of the Futures Contract
The price of the futures contract is basically:
- Underlying asset spot market price (DF),
- Interest rate
- volatility
- Dividend Return (Share and Index VIS)
- It is affected by the change in the number of days to maturity (VKG).
| Futures | forward |
|---|---|
| Traded on the stock exchange | Traded over the counter market |
| Contract with essential elements standardized | Ordinary contract, the essential elements of which are freely determined between the parties |
| There are many dates set for delivery | A single specified delivery date |
| Profit / loss is calculated daily (marking to market) | Profit / loss occurs on the due date |
| The position is usually closed before the due date | The position is closed on the due date |
| It is mandatory to deposit collateral in order to make transactions. | No deposit is required |
| There is no credit risk or very low, as it is a clearing house | there is no acacia establishment. The parties have credit risk since there is a risk of not fulfilling their contractual obligations. |
Disclaimer:"The Futures Calculator calculates the maturity theoretical price by adding the transportation cost according to the risk price of the underlying asset according to the risk-free interest rate. The values to be calculated are entirely theoretical and are based on the assumptions of the model and the values entered by the investors. obtained from errors or using a calculator
