What are the Features of a Futures Contract?
Features Contracts have similar characteristics to those of real contracts since they involve agreements between two parties. However, several aspects stand out that separate the features of futures contracts from other contracts. Features contracts are conducted at a specific place. Unlike other investment contracts that can take place over the counter, futures contracts are held at a particular stipulated location. The feature ensures that the contract is readily bought and sold during the trading date.
Additionally, futures contracts have a standardized rate of exchange. For example, the contract should not involve decimals or fractional numbers. Moreover, the futures contract has to have a specific amount to be traded. The company can also set a maximum or a minimum for trading on a particular date. The feature ensures that the buying and selling rates of the contracts are standardized unlike in forward currency contracts where the buyer and the seller of the product negotiate the terms of the arrangements.
Furthermore, you can only trade with futures accounts if you are an exchange member. Clients that are not exchange members are not allowed to trade. However, an exchange member can do the trading for you. Some of the members are also known as clearing members, while others are non-clearing members. If you are a non-clearing member, you have to clear with the clearinghouse through a clearing member. At the end of the day, the contracts are marked to market. The procedure involves the reprising of the settlement price of the arrangements. The system makes you make a loss or a profit since marking to market debits those who made a loss and credits those who made a profit at the end of the day.
Lastly, not all futures contracts reach their maturity date; an opposite matching contract nullifies most of them. Consequently, the contracts do not enter their maturity date. The phenomenon arises since many investors use futures contracts as a means of hedging against risk and not gaining a profit. However, other investors use the contract as a means of speculating the market prices.
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