1. Definition of Futures Contract
A futures contract is a contract between two parties where both parties agree to buy and sell a particular asset of specific quantity and at a predetermined price at a specified date in the future.
The predetermined price the parties agree to buy and sell the asset for is known as the forward price. The payment and delivery of the asset is made on the future date termed as delivery date.The assets that both parties agree to exchange are called "Underlying assets".
The buyer in the futures contract is known as to hold a long position or simply long. The seller in the futures contracts is said to be having short position or simply short.
2. The Origin of Futures Contract
A futures contract is a standardized contract that is uniformly formulated by the futures exchange and provides for the delivery of a certain quantity and quality of goods at a specific time and place in the future. It is the target of futures trading. Traders hedge against risk of market volatility and gain returns by trading contracts.
Futures contract is developed on the basis of Spot contract and Forward contract, the basic difference between which is the standardization of Futures contract terms. Futures contract become universal with the standardization of the quantity, quality and the delivery level of underlying assets as well as the rate of premium and discount of Substitutes, deliver location, delivery date.
Futures price is the only variable made by open bidding in Exchange in futures contract.
3. Categories of Contract
There are two categories of digital currency contract: Futures Contract and Perpetual Contract.
(1) Futures contract: Futures delivery refers to that traders consummating the contract by transferring the ownership of contract when the contract is expired.
(2) Perpetual Contract: A Perpetual Contract is a derivative product that is similar to a spot margin trading with is settled with coins like BTC or USDT. Investors buy the contract to be a long position holder and yield a profit if the digital currency’s price goes up. On the contrary, they sell the contract to place short orders to benefit when the price dumps.
Perpetual Contract has a few different specifications. Unlike the traditional form of futures, it doesn’t have an expiry date. So one can hold a position for as long as they like. The trading of perpetual contracts is based on the Price Index of the underlying assets, which anchors its price to the spot market price through Funding Fee mechanism.
Dec. 19, 2019