Question

Do futures contracts need to be regulated? If yes, what can go wrong without regulation? Give an example to explain your answer.

Answer 1

Future contracts is a standardized forward contract, illegal agreement to buy or sell something at a predetermined price at a specified time in the future. The asset transact it is usually a commodity or financial instrument. The predetermined price the parties agree to buy and sell the Asset for is known as forward price.

The specified time in the future which is when delivery and payment offer is known as delivery date. Because it's a function of an underlying asset, a future contract is a derivative product.

all the future contracts are oriented towards the future time. Their main purpose is to mitigate risk of default by either party in the intervening period the future exchange requires both party to put initial cash or a performance Bond known as the margin.

All future transactions in the United States are regulated by the commodity futures trading commission and independent agency of the United States Government. The commission has the right to hand out fines and other punishments for an individual or company who breaks any rules. All mobile or the commission regular its all transactions each exchange can have its own rules, an under contract can find companies to different things or extend the fine that the commodity future trading Commission hands out.

The commodity future trading Commission publishers weekly reports containing details of the open interest of market participants participants for each market segment that has more than 20 participants. These reports are released every Friday and contain data on open interest split by reputable and non reportable open interest as well as commercial and noncommercial open interest. This type of report is referred to the commitments of traders.

Forward contracts have credit risk but futures do not because a clearing house guarantees against default risk by taking both sides of trade and marking to market their positions every night for with sir basically and regulated while future contracts are regulated at the Federal government level.

To minimise territories to the exchange traders must poster margin on the performance Bond typically 5 to 15% of the contracts value.

To minimise counterparty risk to traders trades executed on regulated future exchange are guaranteed by a clearing house. The clearing house becomes the buyer to each seller, and the seller to each buyer so that in the event of counterparty default the clearer assumes the risk of loss.

This enables traded to transact without performing due diligence on their counterparty.

If there had been no regulations in the future contract

Some broker could have insisted clients close positions before delivery

Trade in lots of present amounts that I am flexible for exact accounting

Mainly trated on United State based exchanges

The trade in large amounts that cannot be partially closed.

Since the future contracts are on Exchange and are regulated they have somewhat reduced counterparty risk. They are being regulated the cost of trading futures are very low compared to currency forwards

For example a party expects to receive payment in foreign currency in the future and wishes to guard against and unfavourable movement of currency in the interval before payment is received however future contracts also offer opportunities for speculation in that a trader who predicts that the price of it will move in a particular direction can contract to buy or sell in the future at a price which will yield a profit.

Future contracts are always traded on an exchange whereas forward always prayed over the counter or can simply be signed contract between two parties

The futures are highly standardized being exchange traded where is few forwards always train over the counter I love you name in the case of physical delivery the forward contract specifies to whom to make jalebi the counter party for the delivery and future contract is chosen by clearing house

Example consider future contract with dollar 100 let's say that a day 50 future contract with a dollar 100 delivery price cost dollar 88 on day 51 the future contract also caused dollar 90 this means that mark to market calculation would require the holder of one side of the future to pay Dollar to on day 51 to track the changes of you forward price the money goes via margin accounts to the holder of the other side of future that is the Lost party wires cash to the other party