Question

3.Explain the futures trading mechanism in detail.

Answer 1

Futures Contracts are agreements in between two parties agreed to exchange an asset for cash in future date and the trade happens over a stock exchange. Since this is traded over a stock exchange, this is well-regulated unlike Forward contract which is traded over Over the Counter. Future contracts benefit the buyer when buyer thinks a commodity's price is likely to be high in the future date and tries to buy it cheaper for the future date with the help of future contract offered by the seller. Credit risk can be handled by the Clearing Corporations.

Now we'll look into the futures trading mechanism as below:

1) Client places the order either by own or through help of a broker.

2) The broker has to confirm over the order receipt and process the same.

3) Client gets the trade confirmation.

4)Amount gets deducted from the client's account to the broker's account by the time trade gets confirmed.

5)Exchange Participant will check the trades to be executed and execute them to the terminals in real-time.

6)Trades gets transmitted to the registration and clearing settlements.