Futures in short

What you need to know about futures.

Investors and traders can use futures for offensive and defensive investments. Futures are the preferred tool of active traders. A volatile market can lead to substantial price movements.

Before you trade futures it is imperative to understand the basic concepts of a futures contract. These concepts are roughly identical across all European and US futures markets. So once you have mastered them you can trade futures on any market you like.futures trading

Futures are contracts which are defined and launched by the exchanges on which they trade. The most famous exchanges in Europe are Eurex (Germany), Liffe (UK) and, Euronext (France, Holland, Belgium). The most famous US futures exchanges are CME, CBOT and, Nymex.

The exchange defines all the parameters of the futures contract it launches. The most important parameters (note: you need to know these) are:

  • The underlying instrument.
    There are futures on commodities, government bonds, currencies, market indices, etc. Popular are, for example, the futures on indices such as the FTSE 100, the DAX 30, the Eurostoxx 50 or the SP 500.
  • The value of a point.
    The Eurex, for example, has defined the point value of its Eurostoxx futures as € 10 per point. You thus simply need to multiply the current level of the index (x points) with € 10 to get the current value of the future. In short, if you buy this future at 2.000 points and it moves up to 2.001 points you make 10 Euro.
  • The tick value.
    This is the smallest increment in which the price of the future evolves. For example the Eurex has defined the tick value of the Eurostoxx futures as 1 point. Simply put, this future will quote 2.000, 2.001, 2.002 etc but never 2.000,50 or another decimal price.
  • The margin.
    The exchange requires the investor to put up part of the value of the future contract which he wishes to buy. In financial jargon this is called the margin. The margin is a fraction of the size of the open position.

    If you do not have the margin your order will be refused. If your account equity slides below the margin your position will be liquidated.

    By allowing the investor to put up only a fraction of the position value, the futures exchanges offer the investor in effect the possibility to determine his own leverage. This is a good thing.

    Say you have £ 10.000 on your account and you open a position worth £ 20.000 you have a moderately leveraged position of 2-to-1.

    If you have £ 20.000 on your account and you open a position worth £ 20.000, you have an unleveraged position. Never use too much leverage.

  • The exchange fee.
    The futures markets will charge your broker a predetermined fixed amount to clear and settle your order. The broker will pass this exchange fee on to his client.

Below you find the main parameters of the FTSE 100 future. Note: these parameters can change and it is advisable to verify them with your broker or on the exchange website before placing an order.

For example: the FTSE 100 future

  • Underlying  : Financial Times Stock Exchange Index
  • Value 1 index point : £ 10
  • Nominal value  : index points x £ 10
  • Tick   : 0,50 index point (so the tick value is £ 5)
  • Exchange fee  : £ 0,28
  • Maturity   : quarterly (March, June, September, December)