At present, the main financial derivatives are: forward, futures, options and swaps.
Financial derivatives have the following characteristics:
1. Zero-sum game: that is, the gains and losses of both parties (uncertain because they can trade in standardized contracts) are completely negatively correlated, and the net gains and losses are zero, so it is called "zero sum".
2. High leverage: the margin system is adopted for derivatives trading. That is, the minimum capital required for trading only needs to meet a certain proportion of the value of the underlying assets. Margin can be divided into initial margin and maintenance margin, and the mark-to-market system is adopted when trading on the exchange. If the margin ratio is lower than the maintenance margin ratio during the transaction, an additional margin notice will be received. If the investor fails to add the margin in time, he will be forced to close his position.
It can be seen that derivatives trading has the characteristics of high risk and high income. The function of financial derivatives is to avoid risks, and price discovery is a good way to hedge asset risks. However, everything has its good side and bad side. If the risk is avoided, someone must bear it. The high leverage of derivatives is to transfer huge risks to those who are willing to bear them. Such traders are called speculators, while those who avoid risks are called hedgers and others are called arbitrageurs. These three types of traders are the same.
Forward contract refers to a contract in which both parties agree to buy and sell a certain amount of financial assets at a certain price at a certain time in the future. The contract shall stipulate the subject matter of the transaction, the validity period and the execution price at the time of delivery.
Futures futures and forwards are very similar. By signing a standardized contract, the buyer and the seller agree to deliver a specific amount of spot at a specific time, price and other trading conditions.
The difference between futures and forwards lies in:
1, with different degrees of standardization. Forward transactions follow the principle of "freedom of contract", and the relevant conditions in the contract, such as the quality, quantity, delivery place and delivery month of the subject matter, are determined according to the needs of both parties. Futures contracts are standardized. The futures exchange has formulated standardized terms such as quantity, quality, delivery place, delivery time, delivery method and contract size for futures contracts of various subject matters, and only determines the price according to market conditions when trading. Because the subject matter of futures trading is limited after all, and the relevant conditions are fixed, although the ability of futures contracts to meet people's needs is not as good as that of forward contracts, standardization greatly facilitates the conclusion and transfer of futures contracts, making futures contracts highly mobile and attracting many traders.
2. trading places is different. Forward trading has no fixed place, and both parties are looking for suitable objects, so it is an unorganized and inefficient decentralized market. Banks play an important role in financial forward transactions. Due to the convenience of delivery of financial forward contracts and the good homogeneity of the subject matter, many banks provide forward trading quotations for customers to choose from, thus effectively promoting the development of forward trading. Futures contracts are traded on exchanges, generally not allowed to be traded over the counter. The exchange not only provides a trading place for futures trading, but also provides many strict trading rules for futures trading (such as price limit system, minimum price fluctuation range, quotation method, maximum position limit, margin system, etc.). ) and provide credit guarantee for futures trading. It can be said that the futures market is an organized, orderly and unified market.
3. The default risk is different. The performance of the forward contract can only be guaranteed by the credibility of both parties. Once one party is unable or unwilling to perform, the other party will suffer losses. The performance of futures contracts is guaranteed by the exchange or clearing company. The two sides of the transaction directly face the exchange, and even if one party defaults, the other party is completely unaffected. The reason why the exchange can provide this kind of guarantee mainly depends on the perfect margin system and the joint unlimited liability of clearing members. It can be said that the default risk of futures trading is almost zero.
The price is determined by different ways. The delivery price of a forward contract is directly negotiated and privately determined by both parties to the transaction. Because there is no fixed place for forward trading, the information is asymmetric when determining the price, and the pricing efficiency of forward trading market is very low. The price of futures trading is determined by many buyers and sellers through their brokers in the exchange. The information about the price is sufficient and symmetrical, and the resulting futures price is more reasonable and unified, so the pricing efficiency of the futures market is higher.
5. Different ways of expression. Because the forward contract is non-standardized, it is very difficult to transfer, and it requires the consent of the other party (due to different credit), so most forward contracts can only be fulfilled through physical delivery at maturity. Physical delivery is time-consuming and laborious for both parties. Because futures contracts are standardized, futures trading is very convenient in the exchange. When one party's purpose (such as speculation, hedging and arbitrage) is achieved, it can close its position and transfer its performance rights and obligations to a third party without the consent of the other party. In fact, most futures contracts are completed by closing positions.
6. The relationship between the two parties to the contract is different. Because the default risk of a forward contract mainly depends on the credit of the other party, you must fully understand the credit and strength of the other party before signing the contract. The performance of futures contracts does not depend on the other party at all, but only on the exchange or settlement company. You can fully understand the other party. In futures trading, traders don't even know who the other party is, which greatly facilitates futures trading.
7. Different settlement methods. After the signing of the forward contract, the settlement will be made when it expires, and no settlement will be made during this period. Futures trading is settled every day. When the futures market price of the same variety changes, it will generate floating profit or floating loss for all long and short futures contracts of this variety, and it will be reflected in its margin account that night. Therefore, when the market price changes in a favorable direction, traders don't have to wait until maturity to gradually realize profitability. Of course, if the market price changes in an unfavorable direction, traders will have to pay the lost amount before the maturity.