Till now we have learnt about what are derivatives, what are the types of derivatives and what are futures. Let’s revise it quickly. A derivative instrument is a contract between a buyer and a seller based on their views about an underlying assets’ future price movement. An underlying asset can be any financial instrument like stocks, bonds, commodities, currencies, interest rates and even indices. After that, we understood various types of derivatives like- Forwards, Swaps, Futures and Options. Then we took it up a notch with understanding Futures. But, as usual, ye dil mange more! That hunger for knowledge in us has not been fulfilled yet. So, in today’s blog, we will be discussing various types of futures. Let’s begin!
1. Commodity Futures
A commodity is anything that holds commercial value. In India, the various types of commodities being traded are Bullion, Agri, Energy, Base Metals. Commodity futures are contracts that derive their value from a commodity, bought and sold at a predetermined price in future. These contracts are usually preferred by producers or buyers to hedge against future price volatility. Some commodities like gold act as a hedge against inflation due to their low correlation with the stock market. In India, commodity futures are traded on Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX).
2. Currency Futures
As the name suggests, currency futures derive their value from the spot rate of a currency pair. A currency pair indicates the price of one currency that can be exchanged for another currency. These contracts allow you to buy or sell a currency at a fixed exchange rate at a future date. These futures are usually used to hedge against currency risk. For example, an importer importing raw materials from US may purchase USDINR futures to safeguard against rupee depreciation in future. In India, currency futures can be traded on NSE, BSE and MCX SX.
3. Interest Rate Futures
These are futures contracts based on interest-bearing debt instruments. The underlying debt instruments can be T-bills, Government bonds, etc. Interest rate futures is a contract between a buyer and a seller for the future delivery of a debt instrument at a predetermined price. These futures are usually used to hedge against interest rate risk. Due to the inverse relationship between interest rate and bond prices, the interest rate futures are also inversely related to the interest rates. In India, NSE and BSE offer interest rate futures
4. Stock Futures
This is where the real game starts! Stock future is a contract with an individual stock as an underlying. It is a contract to buy or sell a stock at a predetermined price and quantity at a future date. Usually, stock futures are used for speculation and/or hedging purposes. You may trade in stock futures on BSE and NSE. However, they are available only for a specified list of stocks that fulfil certain criteria as stated by the exchanges.