What is the expiration of futures
- Analyst AZA
What is the expiration of futures
Futures contracts have revolutionized the exchange markets. The original purpose of their creation was to provide a completely new financial relationship between the seller and the buyer. With the help of a futures contract, traders began to negotiate in advance the delivery and negotiate products that arrive at a predetermined price by a fixed date. The new model of the commodity exchange provided the players with the opportunity to improve relations between the players, to make them more transparent, while the market acted as a guarantee for the implementation of the contract. But it is quite natural that after a certain period and rapid market development, along with delivery contracts (futures that still take place on the commodity exchange), settlement futures arose. Their main purpose is speculative trading activities, as well as hedging risks (about the underlying asset). But one way or another, the only link between them is the expiration of futures. The expiration date of the futures is the date on which the contract and the obligations assumed by the parties to the agreement are implemented. Considering the delivery option of futures on the commodity market, it is on this day that the goods are delivered and the payment for them is realized (at a predetermined cost). It is also worth it because the expiration of futures is of a settlement type, and specifically, a speculative one, differs from a commodity one, namely, on a fixed day, trading on an instrument is suspended, and it is withdrawn from the exchange. It is for this purpose - not to fall under the automatic closure of transactions, at a price that will be unacceptable and unprofitable for the player, you need to specifically know the date of completion of the contract chosen by the player. About time boundaries, futures are often expired four times a year - every quarter. Of course, depending on the type of exchange, as well as based on the futures themselves, the expiration may differ. The price movement of a future (as a derivative instrument), as a rule, is carried out, in the same way, relative to the movement of the price of the underlying asset - security, an index, or a stock. This characteristic of contracts is actively used by exchange players to hedge the risks that occur during the period of trading with the underlying instrument. But in the last few weeks, immediately before expiration, the price movement of the futures contract and the underlying asset diverges, and such a value as volatility significantly slows down. This fact is because as they approach expiration, players decide to strengthen their trading operations - they fix positions at a favorable value, and then move to the next contract for this instrument, but which has a different expiration time. Such an important point must be taken into account in your trading: tactics based on correlation and spread can be very destructive for a trader - they can cause large financial losses. Information about the expiration time of futures is a must because the level of market activity significantly depends on it. Also, it is important to know that at the time of expiration, the trading operation is automatically closed by the broker itself, at the market value. This fact can also affect losses. Therefore, the trader can find and read all the necessary data in the name of the selected futures contract. Successful trading!
Futures contracts have revolutionized the exchange markets.