Future contract:
A
future contract is standardize contract in which both the parties are committed
to each other a specified quantity of a specified asset at an agreed price on a
given date. The main difference between future contract and forward contract is
that forward contract is a standardized contract.
Standardization means where quantity, quality, time and
price all are specified and fixed.
Briefly explained:
Quantity : suppose you want to buy reliance stock and
whose lots size is 100 if you want to enter into future contract in reliance
stock you have to buy 100 stock or multiple of it.
Quality : the stock should be the reliance stocks not
any other company.
Date and month of delivery : date & month is
determined by the exchange.
Unites of price quote: price variation should be
specified.
In future contract
a third party is existed which is known as clearing house. This clearing house
plays a vital role in trading in future contract. It provides guarantees
performance consequently there is no risk of default. Since there is no default
risk and clearing house acts as a guarantor and it would require the parties to
maintain a deposit (margin) with it.
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