Futures

[barney]

Hi, I'm just starting chapter 1 so I have a really basic question

Futures are standardised contracts -
so the amount of the underlying asset traded under each contract is fixed; the delivery date is fixed;
and I would've thought that the price at which parties will trade the underlying asset would also be fixed.
But then, the notes talk about the two paries agreeing a futures price. Does this mean the two parties agree the price at which they will trade the underlying asset at the delivery date? Or is there some kind of premium you must pay in order to take part in a futures contract (similar to an option premium?)

Thanks!

 

[didster]

Basically, the price is the amount of money that the parties agree to pay for the underlying in the future. It is agreed between the parties when the contract is taken out (bought/sold).
Eg you agree now to pay £100 for delivery in 1 year's time. Once it's agreed it's fixed (but other (new) contracts will need to be negotiated again).

Standardisation doesn't mean that you standardise the price - it's everything else that is standardised. The price is subject to market rates, ie buyer and seller are matched at a price both are willing to trade.

Theoretically, you don't need to pay anything until delivery.
In practice, some exchanges will require a margin account, which is basically similar to a bank account and is used as collateral for any losses that your futures position may have. If this is the case, you need to pay some cash up front (but it is just into the account). Options are sometimes traded with a margin account as well.