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Futures are contracts between two parties in the trade, which obliges one party to sell asset to another party on a certain day in the future. At the time of contracting there is no obligation to pay or transfer assets. This is done at the time of contract implementation. At the time of contracting, only initial margin needs to be paid.

For participants in the trading of futures is said that they take up the position, which can be:

(1) Long position: obliges the buyer to buy assets on the date of maturity.

(2) Short position: obliges the seller to deliver assets on the date of maturity.

Futures contract can be liquidated if the parties wait till settlement date and that way assets are transferred to buyer (known as cash settlement). Rarely, however, parties are waiting until the maturity date. More likely they liquidate the contract by taking opposite positions from those established by contract (known as reversing trade).

During futures trading the investor has to give the deposit (known as initial margin). Except initial margin, there is also maintenance margin. Maintenance margin represents the minimum amount of money that an investor must have on his account. If margin level drops below the minimum amount for longer than one day, broker closes automatically position. A margins allows investor to make big profits, but investor may also suffer a great loss. You can read more about margins in chapter about margins.

There are different types of futures:

Index futures - underlying financial instruments are well-known indices. Index futures were first created in the U.S. 1982. They are useful for investors who prefer to work with trend movement of market and not to analyze every stock particular - they bet on the market.

Stock futures - give the owner the right to buy or sell a single stock on a particular day in the future on predefined price.

Interest rate futures - are effective for protection against the risk of interest rates. Owner usually waits for the delivery of physical assets (bonds). Interest rate futures are basically a fixed-yield instruments such as short-term government bonds (known as T-bills), long-term bonds, euro-dollar deposit certificates.

Currency futures - are contracts to buy the world's currencies in the future in standardized volumes. Their most important function is protection from non wanted currency fluctuations (hedging), but speculators also often use them.

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