Futures Training

Difference between Futures and Forex

What is a Futures Contract

Futures contracts are financial instruments that allow market participants to

offset or assume the risk of a price change of an asset over time.

A futures contract is distinct from a forward contract (forex traded futures) in

two important ways: first, a futures contract is a legally binding agreement to
buy or sell a standardized asset on a specific date or during a specific month.
Second, this transaction is facilitated through a futures exchange.

The fact that futures contracts are standardized and exchange-traded makes
these instruments indispensable to commodity producers, consumers,
traders and investors.

Standardized Contract

An exchange-traded futures contract specifies the quality, quantity, physical

delivery time and location for the given product. This product can be an
agricultural commodity, such as 5,000 bushels of corn to be delivered in the
month of March, or it can be financial asset, such as the U.S. dollar value of
62,500 pounds in the month of December.

The specifications of the contract are identical for all participants. This
characteristic of futures contracts allows buyer or seller to easily transfer
contract ownership to another party by way of a trade. Given the
standardization of the contract specifications, the only contract variable is
price. Price is discovered by bidding and offering, also known as quoting,
until a match, or trade, occurs.

Futures contracts are products created by regulated exchanges. Therefore,

the exchange is responsible for standardizing the specifications of each
contract.

Exchange Traded

The exchange also guarantees that the contract will be honored, eliminating
counterparty risk. Every exchange-traded futures contract is centrally
cleared. This means that when a futures contract is bought or sold, the
exchange becomes the buyer to every seller and the seller to every buyer.
This greatly reduces the credit risk associated with the default of a single
buyer or seller.
The exchange thereby eliminates counterparty risk and, unlike a forward
contract market, provides anonymity to futures market participants.

By bringing confident buyers and sellers together on the same trading

platform, the exchange enables participants to enter and exit the market
with ease, makings futures markets highly liquid and optimal for price
discovery.

What is a Forward Contract

A customized, privately negotiated agreement between two parties to buy or

sell an asset at a predetermined price on a specific future date, used for
hedging or speculation, but not traded on an exchange.

Unlike standardized futures contracts, forward contracts are tailored to the

specific needs of the parties involved, allowing for flexibility in terms of the
asset, quantity, and delivery date.

Forward contracts can be settled through physical delivery of the underlying

asset or through a cash settlement, where the difference between the
contract price and the market price is paid.

Due to the private nature of forward contracts, there is a risk that one party
may default on its obligations, known as counterparty risk

What is a Contract for Difference (CFD)

A CFD is an agreement between an investor and a CFD broker to exchange

the difference in the value of a financial product between the time the
contract opens and closes. Investors use CFDs simply to bet on whether the
price of the underlying asset will rise or fall. It's an advanced trading strategy
that should be used only by experienced traders.

No physical goods or securities are delivered in a CFD transaction. A CFD

investor never owns the underlying asset but is paid based on the price
change of that asset. For example, instead of buying or selling physical gold,
a trader simply speculates on whether the price of gold will go up or down.

By focusing only on price changes rather than asset ownership, CFDs can
provide a capital-efficient trading approach. While CFDs are widely available
on over-the-counter (OTC) exchanges across Europe, Australia, and Asia,
they're prohibited for retail traders in the U.S.

Why are they banned

There are several reasons the Securities and Exchange Commission (SEC)
has banned CFDs:

 Leverage and risk concerns: CFDs typically offer high leverage,

which can amplify both gains and losses. U.S. regulators consider this
level of leverage too risky for retail investors, as it can lead to financial
losses that greatly exceed the initial capital.

 OTC trading: The SEC prefers financial instruments to be traded

on regulated exchanges that provide greater transparency, price
discovery, and investor protection.

 Investor protection: The U.S. regulatory framework has historically

emphasized investor protection more heavily than other jurisdictions.
The SEC views CFDs as simply too complex for average retail investors.

 Existing alternatives: The U.S. already has established markets for

futures and options, which offer similar speculative prospects but with
greater regulatory oversight and exchange-based trading.

 Limited recourse for investors: Since CFD providers are often

located offshore, U.S. investors might have limited legal recourse in
case of disputes or broker failures.

TICKS, POINTS, PIPS The difference

Point, tick, and pip are terms traders use to describe price changes in
financial markets. While traders and analysts use all three terms in a similar
manner, each is unique in the degree of change it signifies and how it is used
in the markets.

A point represents the smallest possible price change on the left side of a
decimal point, while a tick represents the smallest possible price change on
the right side of a decimal point.

A pip, short for "percentage in point," is similar to a tick in that it also

represents the smallest change to the right of the decimal, but it is a crucial
measurement tool in the forex market.

Points

A point is the largest price change of the three measurements and only
refers to changes on the left side of the decimal, while the other two include
fractional changes on the right.
An investor with shares in Company ABC stock might describe a price
increase from $125 to $130 as a five-point movement rather than a $5
movement.

Some indexes restate prices in a manner that allows investors to track price
changes in points. For example, the investment-grade index, or IG Index,
tracks price movements to the fourth decimal. However, when quoting
prices, it shifts the decimal four places to the left so movements can be
stated in points. Therefore, the price of 1.23456 is stated as 12,345.6.

Future Contract Specifications

Every futures contract has an underlying asset, the quantity of the asset,
delivery location, and delivery date.

For example, if the underlying asset is light sweet crude oil, the quantity is
1,000 barrels, the delivery location is the Henry Hub in Erath, Louisiana and
the delivery date is December 2017.

When a party enters into a futures contract, they are agreeing to exchange
an asset, or underlying, at a defined time in the future. This asset can be a
physical commodity like crude oil, or a financial product like a foreign
currency.

When the asset is a physical commodity, to ensure quality, the exchange

stipulates the acceptable grades of the commodity.

For example, WTI Crude Oil contracts at CME Group is for 1,000 barrels of a
grade of crude oil known as “light, sweet” which refers to the amount of
hydrogen sulfide and carbon dioxide the crude oil contains.

Futures contracts for financial products are understandably more

straightforward: the U.S. dollar value of 100,000 Australian dollars is the U.S.
dollar value of 100,000 Australian dollars.

Each futures contract specifies is the quantity of the product delivered for a
single contract, also known as contract size. For example: 5,000 bushels of
corn, 1,000 barrels of crude oil or Treasury bonds with a face value of
$100,000 are all contract sizes as defined in the futures contract
specification.

The exchange defines the contract size to meet the needs of market
participants. For example, participants who wish to take a speculative or
hedging position in the S&P 500 futures contract but cannot risk the
exposure of that size contract ($250 x the S&P 500) can instead use the E-
mini S&P 500 futures contract to gain that exposure ($50 x the S&P 500
Index).

A futures contract also specifies where the asset will be delivered upon
execution. Delivery is an important consideration for certain physical
commodity markets entailing significant transportation costs. For example,
the random-length lumber contract at CME Group specifies that delivery
must occur in a specific state and in a certain type of boxcar.

Finally, every futures contract is referred to by its delivery month. Traders

refer to the March Corn contract or the December WTI contract since this
point in the future is germane to the value and execution of the contract
position. Depending on the contract market, delivery can be anywhere from
one month to several years in the future. The exchange specifies when
delivery will occur within the month and when a given contract initiates and
terminates trading. Typically, trading for a contract is halted a few days
before the specified delivery date.

Contract Trading Codes

The display format of futures contract codes is fundamental to understanding

pricing across multiple expirations.

Contract display codes are typically one- to three-letter codes identifying the
product followed by additional characters indicating the month and year of
expiration. The format of a contract code varies according to the asset class
and trading platform. Many contract codes originated on the trading floor to
convey maximum information with the fewest characters and migrated intact
to the electronic environment.

For this exercise, let’s look at the E-mini S&P 500 futures contract. The CME
Globex contract code for this product is ES, which is also the contract code
used on CME ClearPort. Keep in mind that contract codes can vary
across platforms.

For contract expiration, additional characters added to the right of the

contract code indicate month and year.

Each calendar month expiration is identified by a single letter as follows:

 January – F

 February - G

 March -H
  April -J

 May - K

 June - M

 July - N

 August - Q

 September -U

 October - V

 November -X

 December -Z

Available contract expiration months may vary by product, but the letter
following the contract code always indicates expiration month. The
expiration year is indicated following the month as a numeric value.

Let’s construct the display code for the E-mini S&P 500 futures contract
expiring January 2019. The first determining factor is trading platform and for
this example we will use CME Globex. For CME Globex the E-mini S&P
contract code is ES. Following ES, we add the expiration month, which for
January is the letter F. Finally, we add a 9 for 2019. Therefore the display
code for the E-mini S&P 500 futures contract expiring in January 2019 is:
ESF9.

Expiration and Settlement

Expiration

All futures contracts have a specified date on which they expire. Prior to the
expiration date, traders have a number of options to either close out or
extend their open positions without holding the trade to expiration, but some
traders will choose to hold the contract and go to settlement.

Settlement

Settlement is the fulfillment of the legal delivery obligations associated with

the original contract. For some contracts, this delivery will take place in the
form of physical delivery of the underlying commodity. For example, a food
producer looking to acquire grain may be looking to take delivery of physical
corn or wheat, and a farmer may be looking to deliver his grain to that
producer. Although physical delivery is an important mechanism for certain
energy, metals and agriculture products, only a small percent of all
commodities futures contracts are physically delivered.

In most cases, delivery will take place in the form of cash settlement. When a
contract is cash-settled, settlement takes place in the form of a credit or
debit made for the value of the contract at the time of contract expiration.
The most commonly cash-settled products are equity index and interest rate
futures, although precious metals, foreign exchange, and some agricultural
products may also be settled in cash.

For traders choosing to go to settlement, the form of delivery will be highly

dependent on the needs of each trader, as well as the unique characteristics
of the product being traded

How Do You Make Money

Ticks

A tick denotes a market's smallest possible price movement to the right of

the decimal. Going back to the IG Index example, if this index elected not to
shift the decimal place to use points, its price movements would be tracked
in increments of 0.0001.

A price change, then, from 1.2345 to 1.2346 would represent one tick. Ticks
do not have to be measured in factors of 10. For example, a market might
measure price movements in minimum increments of 0.25. For that market,
a price change from 450.00 to 451.00 is four ticks or one point.

Pips

A pip is actually an acronym for "percentage in point." A pip is the smallest

price move that an exchange rate can make based on market convention.
Most currency pairs are priced to four decimal places and the smallest
change is the last (fourth) decimal point.

A pip is the equivalent of 1/100 of 1%, or one basis point (bps). For example,
the smallest move the USD/CAD currency pair can make is $0.0001 or one
basis point.

When to Use Pips, Points, or Ticks

Understanding when to use pips, points, or ticks depends on the context and
the specific market you are dealing with. Here are some guidelines to help
you determine which term to use:
Points

Points are useful for describing significant movements on the left side of
the decimal point.

When to Use Points: when discussing larger price changes, especially in

stock markets.

Example: An increase in the price of a stock from $150 to $155 is referred to

as a five-point movement.

Pips

Pips are ideal for measuring small price movements in exchange rates

When to Use Pips: in the forex market, where currency pairs are typically
priced to four decimal places.

Example: When trading the EUR/USD pair, a change from 1.1234 to 1.1235 is
described as a movement of one pip.

Minimum Price Fluctuation

All futures contracts have a minimum price fluctuation known as a tick. Tick
sizes are set by the exchange and vary by contract instrument.

E-min S&P 500 tick

For example, the tick size of an E-Mini S&P 500 Futures Contract is equal to
one quarter of an index point. Since an index point is valued at $50 for the E-
Mini S&P 500, a movement of one tick would be

.25 x $50 = $12.50

Micro is .10 x $50 = $5.00 a tick

NYMEX WTI Crude Oil

The tick size of the NYMEX WTI Crude Oil contract is equal to 1 cent and the
WTI contract size is 1,000 barrels. Therefore, the value of a one tick move is
$10.

Summary

Tick sizes are defined by the exchange and vary depending on the size of the
financial instrument and requirements of the marketplace. Tick sizes are set
to provide optimal liquidity and tight bid-ask spreads.
Trade Instruments

10Y Micro 10-Year Yield CBOT

1OZ 1-Ounce Gold COMEX

2YY Micro 2-Year Yield CBOT

30Y Micro 30-Year Yield CBOT

5YY Micro 5-Year Yield CBOT

6A Australian Dollar CME

6B British Pound CME

6C Canadian Dollar CME

6E Euro FX CME

6J Japanese Yen CME

6L Brazilian Real CME

6M Mexican Peso CME

6N New Zealand Dollar CME

6S Swiss Franc CME

Nano Bloomberg
B5 Large Cap Index Coinbase Derivatives
Futures

BCH Bitcoin Cash Coinbase Derivatives

Coinbase Nano
BIT Coinbase Derivatives
Bitcoin

BTC CME Bitcoin CME

Coinbase Bitcoin
BTI Coinbase Derivatives
Futures

Brent Crude Last

BZ NYMEX
Day Financial

CC Cocoa ICE Futures US

CL Crude Oil NYMEX

CT Cotton ICE Futures US

DOG Dogecoin Coinbase Derivatives

DX US Dollar Index ICE Futures US

E7 E-Mini Euro FX CME

E-Mini S&P Midcap

EMD CME
400

ES E-Mini S&P 500 CME

ET Coinbase Nano Ether Coinbase Derivatives

ETH Ether CME

Coinbase Ether
ETI Coinbase Derivatives
Futures

E-mini S&P 500

EWF CME
Equal Weight

FDAX DAX Index EUREX

FDXM Mini-DAX EUREX

FDXS Micro DAX Index EUREX

FESX Euro Stoxx 50 EUREX

FGBL Euro-Bund EUREX

FGBM Euro-Bobl EUREX

FGBS Euro-Schatz EUREX

FGBX Euro-Buxl EUREX

Micro EURO STOXX

FSXE EUREX
50

FVS VSTOXX EUREX

FXXP STOXX Europe 600 EUREX

GC Gold COMEX
GE Eurodollar CME

GF Feeder Cattle CME

GOL Gold Coinbase Derivatives

HE Lean Hogs CME

HG Copper COMEX

HO Heating Oil NYMEX

J7 E-Mini Japanese Yen CME

KC Coffee ICE Futures US

Micro Bloomberg
LB5 Large Cap Index Coinbase Derivatives
Future

LBR Lumber CME

Random Length
LBS CME
Lumber

LC Litecoin Coinbase Derivatives

LE Live Cattle CME

Micro SuperTech
LTEC Coinbase Derivatives
Index

Micro E-mini Russell

M2K CME
2000

E-Micro Australian
M6A CME
Dollar

M6B E-Micro British Pound CME

M6E E-Micro Euro CME

MBT Micro Bitcoin CME

MCD E-Micro Canadian CME

 Dollar

MCL Micro Crude Oil NYMEX

Micro E-mini S&P

MES CME
500

MET Micro Ether CME

Mini-MSCI EAFE
MFS ICE Futures US
Index

MGC E-Micro Gold COMEX

MHG Micro Copper COMEX

MJY E-Micro Japanese Yen CME

Micro E-mini S&P

MMC CME
MidCap 400 Index

Mini-MSCI Emerging
MME ICE Futures US
Markets Index

Micro Henry Hub

MNG NYMEX
Natural Gas

Micro Nikkei Stock

MNK CME
Average

Micro E-mini
MNQ CME
NASDAQ-100

Micro E-mini S&P

MSC CME
SmallCap 600 Index

MSF E-Micro Swiss Franc CME

Micro Ultra 10yr

MTN CBOT
Note

MWN Micro Ultra T-Bond CBOT

Micro E-mini Dow

MYM CBOT
$0.50

MZC Micro Corn CBOT

MZL Micro Soybean Oil CBOT

MZM Micro Soybean Meal CBOT

MZS Micro Soybean CBOT

MZW Micro Wheat CBOT

NG Natural Gas NYMEX

NKD Nikkei 225 (USD) CME

NOL Coinbase Nano Oil Coinbase Derivatives

NQ E-Mini NASDAQ 100 CME

OJ Orange Juice ICE Futures US

PA Palladium NYMEX

PL Platinum NYMEX

QC E-Mini Copper COMEX

QG E-Mini Natural Gas NYMEX

QH E-Mini Heating Oil NYMEX

QI miNY Silver COMEX

QM E-Mini Crude Oil NYMEX

QO E-Mini Gold COMEX

RB RBOB Gasoline NYMEX

RTY E-Mini Russell 2000 CME

SB Sugar No. 11 ICE Futures US

SI Silver COMEX

SIL Micro Silver COMEX

SOL Nano Solana Coinbase Derivatives

SPIKES Volatility
SPK MGE
Index

SR1 One Month SOFR ICE Futures US

 Index

Nano SuperTech
TEC Coinbase Derivatives
Index

TN Ultra 10-Year T-Note CBOT

20yr US Treasury
TWE CBOT
Bond

Ultra US Treasury
UB CBOT
Bond

XC Mini Corn CBOT

XK Mini Soybean CBOT

XW Mini Wheat CBOT

YG Mini-Gold ICE Futures US

YI Mini-Silver ICE Futures US

YM E-Mini Dow ($5) CBOT

3 Year US Treasury
Z3N CBOT
Notes

ZB US Treasury Bond CBOT

ZC Corn CBOT

ZF 5-Year T-Note CBOT

ZL Soybean Oil CBOT

ZM Soybean Meal CBOT

ZN 10-Year T-Note CBOT

ZO Oats CBOT

Fed Funds 30 Day

ZQ CBOT
(Globex)

ZR Rough Rice CBOT

ZS Soybeans CBOT
ZT 2-Year T-Note CBOT

ZW Wheat CBOT