Question

Define, explain and provide the characteristics of a futures contract. Explain in detail the Dow futures contract and its relation to the U.S. Stock Market. Discuss and examine why the price movement of the Dow futures can affect the Straits Times Index.

Answer 1

Futures contract- Are the contracts, in which two parties agree to buy or sell an asset at predetermined price in the future at or before a specified date.

Characteristics of Futures contract - Are as following:

1. They are standardize contract and not customized.
2. They have their expiry dates.
3. They have a legal structure and traded on exchange.
4. A single clearing house acts for all the futures contracts.
5. Futures contracts require initial and maintenance margin to carry a position.
6. These are based on underlying asset that can be stock, commodity, currency etc.

Dow Futures- It is the index futures contract that is traded on exchange. Dow jones industrial average index is the underlying for Dow futures. It has 30 stocks of U.S companies. Dow futures provide the investors to trade in either bullish or bearish side as per their expectations. It provides investors to trade in overall market. These are very liquid contracts and with the help of Dow futures, investor hedge their positions.