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Futures contracts in risk management companies can use trading on a US exchange - Essay Example

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Futures contracts in risk management companies can use trading on a US exchange

The agreement is based on a future transaction in which the commodity will be paid for in future at a time agreeable by both of the parties. This term is common in finance. These contracts are done on mutual consent negotiated at futures exchange acting as an intermediary. The partner who has agreed to purchase the asset in question is referred to as a long whereas the party who sells the given asset is said to short. The price agreed upon by both of the parties is the strike price. This means that the parties have agreed that the price is fair, and they will follow the accord. In this type of transaction, the buyer hopes that the price quoted in the transaction would rise in the future while the seller hopes that the price would decrease in the future. After the deal is sealed the buyers and the sellers would monitor the activities of the futures until the specified date comes. This trading method does not incorporate the usual products for trading. Literature Review A number of articles, journals and books have been written to discuss this for of trading. Usually the commodities that are involved are items that include; treasury bonds, currency, stocks and other intangible financial commodities. Sometimes futures’ trading is based on referenced commodities like interest rates (JORION, 2011, 39). The parties taking part in a futures trade do it to reduce the risk of losses that could be incurred by either of the parties. The parties are required to set up an agreeable amount of money known as the margin to cushion them. In the case the futures price keeps changing every day, the difference between the daily futures price and the first agreed upon price is settled by the margin that had been deposited by the buyer and the seller. This difference also referred to as the variation caters for and covers the daily profits and losses incurred by both the buyer and the seller. Once the margin variation goes beyond the initial deposited margin, a margin alert is made to the owner of the account to restock the account so that both the buyer and the seller have an appropriate daily profit and loss amounts. This exercise is referred to as marking to market (JAMES, 2008, 97). After all this done, the price that is traded upon is the spot value since both the profits and losses incurred by both seller and buyer has been settled. On the day of the specified contract, both of the parties are required to fulfill their part of the bargain and deliver commodity as per the contract (Frazer & Simkins, 2010, 302). In case it was cash that was involved in the trade, the party who incurred the loss is supposed to pay the party that made a profit. In the event one of the parties is not willing to proceed with the transaction, he or she has an option. They can take the opposite position on another futures contract and using the same asset but the date and time remain the same. The difference that comes after that is then a profit or a loss. Taking the side of one of the parties ...Show more

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Futures contracts in risk management companies can use trading on a US exchange Name Professor Course Date Executive Summary Futures contracts require two parties in order to be executed. It requires a buyer and a seller for complete transactions. The main reason for engaging in a futures exchange is to prepare stakeholders for any eventuality and be in a position of making appropriate decisions…
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