√ Definition of Stock Index Futures Contracts, Benefits and Risks
Understanding Stock Index Futures Contracts, Benefits and Risks - In the discussion this time About Knowledge will explain about Stock Index Futures Contracts. This is related to investment and how the risks are for parties related to futures contracts.
Understanding Stock Index Futures Contracts, Benefits and Risks
For a more detailed review, this time we provide material what is the definition of a stock index futures contract, what are the benefits of investing and what are the risks of investing. Read more below.
Definition of Stock Index Futures Contracts
A stock index futures contract is a contract or an agreement between two parties that requires them to sell or buy a product that becomes the main variable in the future at a predetermined price previously. The object being exchanged is called the underlying asset.
Before entering into a contract, each party must report the initial margin and therefore the contract has limited time, then there is an expiry date the position of the contract must be closed at whatever price is stated on exchange.
The margin has to be at a certain price level and if the margin falls below a certain level, it is occurs often due to very large losses and the clearing house will ask investors to add the funds.
Investment Benefits of Stock Index Futures Contracts
Having an investment in a stock index futures contract will have the following benefits:
Hedging Instruments
Hedging instrument means to maximize risk. For example, an investor who has a portfolio plans to release one of the shares he has acquired by setting the selling price of his shares at that time.
The investor has a choice he can open a sell contract in the future, whatever the price that occurs at maturity, the investor will still sell the shares at a predetermined price previously.
Speculation
Speculation, that is, investors can speculate by trading index futures rather than making transactions for individual stocks. This is possible because there is leverage.
With this leverage, investors can benefit from movements with less capital compared to the capital that must be issued when carrying out trading transactions in each share has.
Arbitration
With arbitrage, investors can earn profits and the difference between Spot Market and Futures Market prices. The Spot Market, if the transaction is now and this market is submitted also up to a period of 2×24 hours.
Meanwhile, futures transactions are current transactions but delivery and payment for the future can take place in the coming weeks or several months.
Investment Risks in Stock Index Futures Contracts
The risks that may occur in stock index futures contracts include the following:
- At maturity, the investor must close or settle his position, even though the price is different the hope of investors is that investors can experience very large losses when compared to the capital they have invested beginning.
- If an investor suffers a large loss, he must deposit additional funds with the clearing house.
Futures Contracts and Delivery Contracts
Futures contracts and delivery contracts are contracts that promise to deliver a commodity at a future date and at a price that has been agreed beforehand. However, there are differences between the two contracts, including:
- Delivery contracts are only made between parties who know each other's counterparty transactions, while futures contracts are carried out between parties who don't know each other's transaction partners makes the value change or occur every day adjustment. The settlement value of the underlying asset at the delivery date will be equal to the spot value of the underlying asset at that time.
- Futures contracts are always traded on exchanges, while surrender contracts are traded outside stock exchanges. Or it can be in the form of a simple contract between two parties who know each other's transaction partners.
- Futures contracts are therefore highly standardized, while handover contracts are unique in accordance with the agreement and needs of the parties.
- In the case of physical delivery, in a futures contract, to whom the goods will be delivered, determined by the futures clearing house because records exist of who has an open position there.
Thus has been explained about Understanding Stock Index Futures Contracts, Benefits and Risks, hopefully can add to your insight and knowledge. Thank you for visiting.
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