To understand what futures are, let's start with the basics. Futures is a kind of financial instrument, and its value depends on (or is derived from) other financial instruments, which we call intangible assets. Common non-physical assets are stocks, bonds and wheat (futures? ), silver coins, Standard & Poor's 500 and other stock market indexes (futures).
Take a simple example of futures, which is an agreement between two investors, in which one party pays the other according to the change of interest rate in the next year. This is called an interest rate futures contract. There are two reasons why this trading arrangement is different from buying bonds directly: First, it provides investors with a convenient way to benefit from falling prices, and buying bonds can be regarded as betting that prices will rise in the future. Second, and more importantly, in futures trading, the loss of one party will inevitably lead to the gain of the other party. Buyers and sellers are like playing poker for two. Whether either side wins or loses depends on the progress of the game, but the total chips on the table will never change.
Futures can not only be used as speculation or gambling on future price changes, but also help investors to cope with and reduce risks (through hedging), which is also an indispensable role of futures in modern economy. Bombardier uses futures to resist risks and avoid paying kickbacks when snowfall is low. We can see that farmers can reasonably use futures to resist the risks brought by the fluctuation of grain market value. By using futures, risks can be transferred or sold. From this perspective, the principle of futures is to transfer the risk from one person or company to other people or companies.
When people can pass on risks, they dare to do what they dare not do when they can't. Imagine wheat growers and bakers. If they can't resist the fall of wheat prices, farmers will choose to reduce the wheat planting area. If the price of flour is irresistible, the baker will reduce the size of the bakery, which is a cautious countermeasure in the face of price fluctuations. Now a mechanism is introduced to ensure that wheat farmers and bakers can avoid the fluctuation of wheat prices. Therefore, farmers who grow wheat will expand their farming area, and bakers will also expand the size of bakeries. It is only because of price protection that we dare to do so. Futures provide such protection. In fact, futures can improve the risk tolerance of the whole economy, optimize the allocation of resources and improve the output of the whole society by transferring risks to those who can bear these risks best.
Futures enable individuals and companies to cope with risks, and also make them hide the true characteristics as specific financial transactions. The stripping of coupon bonds can separate coupon payment from principal payment. Similarly, buying and selling futures can essentially separate any kind of future payment from its future risk. A company is hesitant to issue coupon bonds because it is afraid that analysts will object to increasing additional debt, so it can not issue coupon bonds, but treat the principal payment as a separate zero coupon bond, and at the same time use things other than borrowing to price futures transactions. In this way, if the analyst devalues the bond because the company raises funds in some way, futures can (as we have seen) make the company obtain the same resources under the same risk, but with different names.
Futures can be divided into three categories: forward and futures, options and swaps. These three words are too professional to translate well. ) Let's take a look at it separately:
There is no word-for-word translation, but the previous content is fine, and the last paragraph is obscure, which roughly refers to the initial issuance of interest-bearing bonds, but because of the fear of interest fluctuation caused by the market, the initial interest price is too high, so you can choose to separate the principal payment from the interest payment, and the principal is actually traded, and the interest is hedged through the futures market. That's about it. Some financial words are too professional to translate well.
It's all hard translation. If you are satisfied, add some points.