Futures Derivatives and Short Selling

Futures Derivatives and Short Selling

Tags:      Gig Economy     Economy     WTO     WTO Public Stockholding     MSP     Economic Growth     Masala Bond     Environmental Performance Index     Forecast of Economic Growth     Functions of the Finance Commission

Futures Derivatives are a major part of financial markets. They provide traders with versatile tools for risk management, speculation, and portfolio diversification. These are standardized contracts that require parties to buy or sell an underlying asset at a predetermined price and date. They offer exposure to a wide range of asset classes, including commodities, equity indices, interest rates, and more. These derivatives feature standard terms and are traded on organized futures exchanges.

Short selling is a prominent strategy in futures trading, allowing traders to profit from falling prices. When an entity engages in short selling, it essentially sells a futures contract they do not currently own. The intention is to buy it back later, ideally at a lower price. futures short selling is particularly useful when traders anticipate a decline in the value of the underlying asset. For example, a trader expecting a drop in the price of gold might sell gold futures contracts. The aim is to repurchase them at a lower price to profit from the price fall.

Futures contracts have a finite lifespan. Thus, when they approach their expiration date, traders must decide whether to close out their positions or to continue them with a later expiration date. This process is known as Futures Rollover. Rollover is a strategic decision influenced by various factors. The factors can be market conditions, costs associated, and the trader's outlook for the asset. Traders may choose to roll over their positions to extend exposure to the asset or close out their positions to make profits or minimize losses.

One of the distinctive features of futures derivatives is their leverage. Futures Leverage allows traders to control a large position with a relatively small amount of capital. Thus, it magnifies both potential gains and losses. For example, a trader may only need to deposit a fraction of the total contract value as a margin to control a futures position. While leverage can increase profits, it also increases the risk of substantial losses, as any adverse price movement is proportionally magnified. Hence, futures leverage trading highlights the importance of risk management. Failure to manage leverage effectively can result in margin calls. In margin calls, traders are required to deposit additional funds to cover their losses or face liquidation of their positions by the broker.