Question

Imagine that you are a financial manager. Determine three key drivers for evaluation when considering whether to invest in the futures market, indicating your likelihood to do so. Provide support for your rationale.

Answer 1

A future contract is a consent to purchase or sell an advantage sometime not too far off at a settled upon price.Futures contracts are institutionalized understandings that commonly exchange on a trade. One gathering consents to purchase a given amount of protections or a ware, and take conveyance on a specific date. The offering gathering to the agreement consents to give it.The prospects market can be utilized by numerous sorts of money related players, including financial specialists and examiners just as organizations that really need to take physical conveyance of the item or supply it.

The three main drivers that investors frequently have are: to hedge,to speculate and to arbitrage.These are polar uses of futures markets. A theorist utilizes a prospects agreement to benefit from developments in future contracts; a hedger, to secure against loss of hazard. Methodologies are down strategies framed by a speculator to manage the hazard and accomplish destinations. These systems depend on a financial specialist impression of how the market will move. Various techniques are accessible for various perspectives on advertise developments. Future agreements techniques can be characterized into three gatherings as referenced beneath:

Hedging Strategies:

Hedge implies taking a contrary position that a financial specialist as of now needs to lessen the danger of value variance. Future contract gives an office to power over the hazard in the spot showcase. There are two supporting procedures: one is long prospects and the second is short fates. A circumstance where a speculator needs to take a long situation on fates contracts so as to support against prospects value instability is known as a long fates procedure. The other circumstance is the point at which a speculator needs to take a short situation on prospects contracts so as to fence against fates value unpredictability.

Speculation Strategies:

Examiners want to take a long or short situation in the market to procure benefits from fluctuating business sector. A long prospects contract speaks to the purchasing position and will give benefits when spot cost increments. Shot position implies selling position and will give benefits just when costs diminishes. A Long fates will gives an arrival, if a speculator accepts that specific stock costs is underestimated and expect its cost will go up in close or mid-month. Stock prospects can be utilized by a theorist who accepts that a specific security is exaggerated and prone to see a fall in cost, for this short fates system might be utilized. Theorists are a daring individual and may make variance in stock prices.

Arbitrage Strategies:

Arbitragers are the individuals who are managing in two markets; purchase stocks from one market at lower cost and sell it in another market at a higher price.The contrast between the purchasing cost and the selling cost will be the benefits to the arbitragers. Managing in spot securities exchange and prospects financial exchange gives the chance to the arbitragers to gain benefits with exchange methodologies, similar to buy stocks from spot showcase at lower cost and short fates contracts at higher prices.With these we can watch fundamental advantages of exchanging fates over other venture options, for example, sparing record, stocks, securities, choices, land etc.That are-

1.Discovery of Prices

2.Reduction of Risk

3.High Leverage

4.Profit in both Bull and Bear Markets and

5.Lower Transaction Cost with High Liquidity.