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A future is a contract to buy or sell an underlying asset at a future price, called the exercise price, at a future date, called the expiry date. A futures contract carries equal risk for the buyer and the seller. Let us turn to future contract risk factors. Remember future contract risk is still there, although the settlement risk is taken away by the clearing corporation. Here let us look at some of the major risks in futures trading. How this risk in futures trading can be addressed?
We are referring to the risks as a futures trader. You will be surprised to know that the actual risks of futures trading go much beyond the price risk. Here is how.
There are different ways to settle a futures contract. For example, if you are long on futures or short on futures, you can just reverse the position by taking a counter position. This is the most common method of settling your futures contract. The second method is by just leaving your position to expiry. If you are holding May-futures, then the position automatically expires on the last Thursday of the month. But the only risk here is that the final settlement price you will get is subject to volatility and hence it is best to have control and closeout positions on your own.
Derivatives trading is largely like cash market trading. The only difference is that in derivatives trading your price is not the price of the stock but the price of the futures or the option price. Also, derivatives trading is a contract and there is no ownership. Just like in cash market trading, you must start derivatives trading by opening your trading account and activating online trading. It is quite simple, once you understand the entire process.
Essentially, you must know that profits can be magnified and losses can also be magnified in the future. Hence keep strict stop losses and profit targets while trading. Also, avoid trading futures very aggressively when markets are volatile.
A futures contract has four unique specifications. Firstly, it is identified as a stock future or index future. Secondly, the underlying stock or index is defined. Thirdly, the expiry date is defined as the last Thursday either of the near, mid-month, or far-month contract. Lastly, the price at which the futures is traded in the futures price.
Futures are also subjected to brokerage rates and statutory charges like your cash market transactions. The rates of brokerage are lower because futures brokerage is charged on notional value. The rates of statutory charges are defined.
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