A futures contract is a type of derivative or financial contract in which two parties agree to make a certain transaction on a specified future date at a specified current price. Trading futures contracts are also known as margin trading.
Margin trading gives a leverage of capital as only a margin needed, usually 5 to 10% of the total value of the contract to trade.
Futures have been gaining popularity throughout the recent years as investors and traders are searching for alternatives for better return of investments and with that popularity, arises different types of futures contract.
Futures contract are classified into two big categories -financial futures and commodities futures.
Types of Financial Futures
Eurodollar futures are U.S. dollars that are deposited outside the country in commercial banks mainly in Europe which are known to settle international transactions. They are not guaranteed by any government but only by the obligation of the bank that is holding them.
U.S. Treasury Futures
Because U.S. Dollars is the reserved currency for most countries, the stability of the dollars allows for treasury futures market and instruments such as treasury bonds and treasury bills.
Foreign Government Debt Futures
Most government issue debt that are corresponded to the futures markets that are listed around the world.
This is generally agreements that are between two parties to exchange periodic interest payments.
This type of futures is to manage the risks and take advantage of related forex exchange rate fluctuations.
Single Stock Futures
Most popular futures contracts are related to the equity markets, they are also known as security futures. There are about 10 companies in Malaysia that offers single stock futures. They are Bursa Malaysia Bhd, Air Asia Bhd, AMMB Holdings Bhd, Berjaya Sports Toto Bhd, Genting Bhd, IOI Corporation Bhd, Maxis Communications Bhd, RHB Capital Bhd, Scomi Group Bhd and Telekom Malaysia Bhd.
Futures that are based on the stock index. In the case of the Kuala Lumpur Composite Index, the index futures will be the FTSE Bursa Malaysia KLCI Futures (FKLI).
Types of Commodities Futures
Major metals traded with futures contracts include copper, gold, platinum, palladium and silver, which are listed on the New York Mercantile Exchange which has merged with the Chicago Mercantile Exchange.
The most popular energy futures contracts are crude oil, crude palm oil, heating oil and natural gas. They have become an important indicator of world economic and political developments and are very much influenced by producing nations such as Malaysia.
Grains & Oil Seeds
Grains such as soybeans and oil seeds are essential to food and feed supplies, and prices are sensitive to the weather conditions, and also to economic conditions that affect demand. Because corn is integral to the increasing popularity of ethanol fuel, the grain markets also are affected by the energy markets and the demand for fuel.
Commodity futures on live cattle, feeder cattle, lean hogs and pork bellies are commodities traded at CME Group Inc and prices are affected by consumer demand, competing protein sources, price of feed, and factors that influence the number of animals born and sent to market, such as disease and weather.
Food and Fiber
The food and fiber category for futures trading includes cocoa, coffee, cotton and sugar. In addition to consumer demand globally, factors such as disease, insect’s infestation and drought affect prices of these commodities.