Product details

Financial futures are futures contracts on bonds, equities and currencies, they give investors a greater opportunity to fine tune the risk-return characteristics of their portfolios. A financial futures contract itself is a standardised, transferable agreement providing for the deferred delivery of a financial instrument (or its cash equivalent). The futures price at which this exchange will occur at contract maturity is determined today. Traditionally participants in the futures markets have been classified as either hedgers or speculators. Hedgers are parties at risk with an asset, which means that they are exposed to price changes. They buy or sell futures contracts in order to offset their risk. In other words, hedgers actually deal in the financial instrument specified in the futures contract. By taking a position opposite to that of one already held, at a price set today, hedgers plan to reduce the risk of adverse price fluctuations - that is to hedge the risk of unexpected price changes. In contrast to hedgers, speculators buy or sell futures contracts in an attempt to earn a return. They are willing to assume the risk of price fluctuations, hoping to profit from them. Unlike hedgers, speculators typically do not transact in the financial instrument underlying the futures contract. In other words, they have no prior market position. Speculators often take a very short term position in an attempt to exploit perceived anomalies or speculative opportunities. This real life case illustrates the returns and potential risks available to speculators in financial futures. The futures market for the Bund, the German government bond market is used as an example.