The basis of futures trading

Futures trading is developed on the basis of spot transactions, through the futures exchange in the futures contracts for the standardization of the conduct of an organized form of transactions. In the futures market, most companies trading futures contracts is designed to avoid the risk of fluctuations in spot prices, and most investors are to win the difference between price fluctuations. So few people are willing to participate in the physical delivery of goods, in the form of hedging to the end before the end. Hedging means that the person buying a futures contract will sell the futures contract before the contract expires, and the person who sells the futures contract will buy the futures contract to close the position before the contract expires. Such short selling activities with regards to future contracts are permitted.

Futures Trading (Futures Trading) refers to the traders in the exchange of open central auction of the sale of standardized futures contracts, buyers and sellers in accordance with the provisions of the contract terms, at a particular time and place in the future, according to the contract price of a transaction A specific quantity and quality of assets or an asset-related indicators. Futures trading and spot trading compared to the usual, the main difference is that buyers and sellers to determine the price of the transaction after a period of time before the “money goods two clear” delivery. Futures trading is developed on the basis of forward transactions, futures trading and forward transactions the most important difference is the standardization of the contract.
With the development of modern commodity economy and the great increase of social labor productivity, the international trade has been carried out and the world market has been gradually formed. The market supply and demand situation is also more complicated. Only a one-time to reflect the expected changes in market supply and demand futures contract price has been unable to adapt to the development of modern commodity economy, and requires a continuous reflection of the potential supply and demand changes in the price of the whole process, so that the majority of production operators to timely adjustment of goods Production, and avoid the adverse changes in prices due to price risk, so that the entire social production process smoothly. In this case, futures trading is generated.

As a general view, futures trading was first produced in the United States, 1848 the United States Chicago Board of Trade (CBOT) was established, marking the birth of futures trading. The emergence of futures trading is not accidental, is based on the development of forward transactions, based on the vast number of commodity producers, traders and processors of a wide range of commercial practice arising. 1833, Chicago has become a center of domestic and foreign trade, after the Civil War, Chicago because of its excellent geographical location and developed into a transportation hub. By the middle of the nineteenth century, Chicago had developed into an important agricultural product distribution center and processing center, a large number of agricultural products in Chicago for sale, people follow the old way of trading in the street bargain face to face transactions. In the harvest season, farmers were delivering food to Chicago, where oversupply caused prices to plummet, so that farmers often did not even get their freight back. By the spring of the following year, cereals were scarce and processors and consumers struggled to buy grain and prices soared. There is an urgent need to establish a new market mechanism and to build more storage and transportation facilities. In order to solve this problem, the grain production to the dealer came into being. Local dealers set up businesses, built warehouses, acquired farmer’s grains, and sold them until the grain moisture reached the required standard. The local dealer buys the farmer’s grain through a forward transaction, stores it first, and goes on sale in batches. Local dealers need to lend to banks in order to buy grain from farmers to store, in the storage process to bear the price of grain over the winter risk, the price fluctuations may make the local dealers unprofitable even cost can not be recovered. The best way to solve this problem is to “buy not sell first”, with forward contracts and Chicago traders and processors to contact the transfer price risk and access to loans. In this way, forward transactions have become a common way of trading.

Chicago traders and processors also face problems facing local dealers, so they are only willing to pay to local dealers at a price lower than their estimated forward price at the time of delivery to avoid The risk of falling prices. As Chicago traders and processors are paying too low prices, local dealers who come to Chicago to negotiate forward contracts have had to look for a wider buyer for their own benefit and a good price for their grain. Some non-grain traders consider it profitable to buy forward contracts and sell them close to the delivery date. In this way, the gradual increase in the purchase of forward contracts to improve the local dealer’s income, local dealers paid to the farmers income has increased. March 13, 1848, the first modern futures exchange – the Chicago Board of Trade (CBOT) was established. At the beginning of the establishment of the Chicago Board of Trade, is not a true modern futures exchange, but also a focus on spot transactions and forward transactions place.
Contract standardization, margin system and unified settlement is the futures trading process of the three milestones. In 1865, the Chicago Board of Trade to achieve the standardization of the contract, introduced the first batch of standard futures contracts. Contractual standardization includes the standardization of quality, quantity, delivery time, place of delivery and payment terms in the contract. Standardized futures contracts reflect the most common business practices, making it easy for market participants to buy and sell futures contracts and to liquidate their original performance obligations by closing positions, greatly increasing market liquidity in futures trading. The Chicago Board of Trade has also standardized on the contract, but also provides 10% of the total value of the contract to pay the trading margin. Margin system effectively avoid the futures trading default, so that the transaction can be normal, continuous manner. With the development of futures trading, clearing the emergence of greater difficulties. The initial clearing method used by the Chicago Board of Trade was a circular settlement, but it was cumbersome and difficult. In 1891, the Minneapolis Grain Exchange, the first to set up a clearing house, then, the Chicago Stock Exchange has also set up a clearing house. Clearing House as the only buyer to settle all the contract with the seller, but also as the only seller and all the contract buyers to settle, greatly improving the efficiency of the settlement. Until the establishment of the modern clearing house, the real sense of the futures trading to be considered, the futures market is considered to be fully established. Therefore, the emergence of modern futures trading and the birth of the modern futures market are the inevitable result of the development of commodity economy and the inherent requirement of social productive forces development and socialization of production.Chicago traders and processors also face problems facing local dealers, so they are only willing to pay to local dealers at a price lower than their estimated forward price at the time of delivery to avoid The risk of falling prices. As Chicago traders and processors are paying too low prices, local dealers who come to Chicago to negotiate forward contracts have had to look for a wider buyer for their own benefit and a good price for their grain. Some non-grain traders consider it profitable to buy forward contracts and sell them close to the delivery date. In this way, the gradual increase in the purchase of forward contracts to improve the local dealer’s income, local dealers paid to the farmers income has increased. March 13, 1848, the first modern futures exchange – the Chicago Board of Trade (CBOT) was established. At the beginning of the establishment of the Chicago Board of Trade, is not a true modern futures exchange, but also a focus on spot transactions and forward transactions place.
Contract standardization, margin system and unified settlement is the futures trading process of the three milestones. In 1865, the Chicago Board of Trade to achieve the standardization of the contract, introduced the first batch of standard futures contracts. Contractual standardization includes the standardization of quality, quantity, delivery time, place of delivery and payment terms in the contract. Standardized futures contracts reflect the most common business practices, making it easy for market participants to buy and sell futures contracts and to liquidate their original performance obligations by closing positions, greatly increasing market liquidity in futures trading. The Chicago Board of Trade has also standardized on the contract, but also provides 10% of the total value of the contract to pay the trading margin. Margin system effectively avoid the futures trading default, so that the transaction can be normal, continuous manner. With the development of futures trading, clearing the emergence of greater difficulties. The initial clearing method used by the Chicago Board of Trade was a circular settlement, but it was cumbersome and difficult. In 1891, the Minneapolis Grain Exchange, the first to set up a clearing house, then, the Chicago Stock Exchange has also set up a clearing house. Clearing House as the only buyer to settle all the contract with the seller, but also as the only seller and all the contract buyers to settle, greatly improving the efficiency of the settlement. Until the establishment of the modern clearing house, the real sense of the futures trading to be considered, the futures market is considered to be fully established. Therefore, the emergence of modern futures trading and the birth of the modern futures market are the inevitable result of the development of commodity economy and the inherent requirement of social productive forces development and socialization of production.

 

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