Question

What characteristic should a cash market have to be a candidate for a futures market?

Answer 1

A cash market is a market where securities like shares and commodities are traded for instant or immediate delivery. Cash Market is also called Spot Market. Whereas Futures market is a market where future contracts are traded at an agreed price and date in future. In futures market contracts have to be delivered on specific dates agreed by both parties.

The characteristics that a cash market have to be a candidate for a futures market are :

• In futures market for initiation of a futures contract a very little or no amount has to be paid whereas in cash market the whole amount has to be paid at the time of initiation. So in order to be a candidate of future market cash market should also have a provision of low initiation price for purchasing stocks,etc
• In futures market the contracts have a expiration or a completion date whereas in cash market there is no such date , one can hold a stock even for lifetime. So in order to be a candidate of future market cash market should also have a provision for limiting the tenure i.e a certain specified holding period.
• In futures market only a pre defined size or amount of futures can be bought whereas in cash market there ks no such limitations one can buy as many stocks they like (i.e even 1 stock or more than that ). So in order to be a candidate of future market cash market should also have a provision of pre defining a size or amount of stocks that can be purchased.
• In futures market there is a initial margin which is a specific amount (i.e 30% , 50% etc) of your contract value that you must pay for trading, in cash market there is no such concept. So in order to be a candidate of future market cash market should also have a provision of deposition of initial margin.