Futures are derivative instruments basically designed to nullify
the market-risk of a particular investment product, or commodity. Index
Futures are contracts whose underlying is the value of the index at any
point of time. By the term underlying we mean that the value of future
will be based on the valuation of the “underlying”, which may be a
commodity, or financial instrument. In commodity futures, say pepper,
the spot price of pepper will be the “underlying” for futures on
pepper.
In developed markets, futures on stock indices, debt,
and security have largest volumes although commodity futures are also
traded in large volumes. In India futures markets exist on six
commodities, castor seed, hessian, gur, potatoes, turmeric, and pepper.
Futures have very practical use for industries and various
businesses, which need predictability of input costs. For example,
corporations dealing in food products may make active use of commodity
futures to hedge input costs of raw food products, prices of which may
vary widely due to the seasonal nature of business.
To understand
Futures you would have to understand concepts of Risk, Future trading,
derivatives, and other relevant terms deployed by financial markets
which combine these concepts to control risks. |