COMMODITIES TRADING & ONLINE REAL TIME TRADE

New Financial Instruments and commodities online trading

Introduction to commodity, future and real time trade

Means New Financial Instruments (NIF), medium term agreements under which a borrower may issue and circulate short-term instruments to finance. Its low cost and high flexibility make them very profitable products. Financial instruments that we describe below, the Forward, Financial Futures, Options and Swap, are instruments that share two characteristics:

# These instruments are off-balance-sheet, that is not listed in the book balances.
#  They are contracts between two parties.

Other features common to these financial products are:
# Have been developed with the intention to limit the high interest rates, volatility and rates of exchange increasingly exposed companies to risk of loss resulting from events difficult to predict.
# The creation of these new products has been possible mainly by the contribution of new technologies (computer) that have enabled the administration and control of a large number of operations in a very short space of time and in a wide geographical coverage.
# The possibility of having this new information technology has allowed these products enjoy security and liquidity which until then was virtually unthinkable.
# These products are used only as a cover for other elements of actual operations.
# As previously mentioned, the NIF (Forwards, futures, options and swaps) do not appear on the balance sheet of the company.

Forwards commodities markets and commodity price. It is a contract between two parties that obligates the holder to purchase an asset for a specified price at a predetermined date. Forward concept exists in the form of various instruments. Is traded mainly through the departments of treasury and / or international trade and currency of financial institutions within a market called over the counter (OTC), ie parallel to the stock market. There is also a market where such assets are traded as futures.

Key Features Forward historical trading commodity:

* Requires no down payment (this is logical, since the price is set by the two parties by mutual agreement). This instrument makes it particularly attractive to hire enough, sometimes one or two phone calls.
* Only when contracts are a single stream of money for a "winner." Therefore, the contract value is discovered only after the fact.
* The contract is, however, binding, does not allow any choice in the future, as in the case of Options.
* Normally it is not negotiable after the close of the contract, not existing secondary markets for Forwards (as is the case for some Futures and Options).
* Forwards only interest rate are sometimes transferred. The Currency Forwards, however, are not transferable and is generally expected that at maturity is settled by actual delivery of the agreed exchange.
* The credit risk on a forward contract can be quite large, and it is always bilateral: the "loser" can be any of the two parties.

Financial futures and commodity index

A Future can be defined as a contract or binding agreement between two parties that agree to exchange one asset, physical or financial, at a specified price and at a predetermined future date. The financial futures were in response to the emergence of excessive volatility in raw material prices, interest rates, exchange rates, etc., Together with other instruments such as FRAs, Swaps and Options all risk management instruments fluctuation of the above variables. The very growth of the economy largely drives the futures markets, which will require increased levels of financial exposing participants to increased risks arising from fluctuations in prices and making those participants requiring the payment of the premium call risk. The existence of the same causes increased costs that come to be intolerable by the members acting. Futures markets thus born as a solution to this problem. Financial futures are defined in Royal Decree 1814/1991 of 20 December, which regulates the official markets of futures and options in Spain.

Futures Contract Types warrants

Currently, almost all futures contract, since it really is negotiated is the price volatility and today's prices fluctuate almost all products for online commodity trading that can be commodities future. May be given a classification of types of contracts, taking into account the underlying assets are based, thus we have real time the commodities: gold, silver, oil... Classification of Types of Futures Contracts. Futures on physical assets (commodities futures) The actual physical assets or futures contracts from two major groups:

* Agricultural products
* Major metals

Currently, its use has spread worldwide, and the main markets are standardized contracts traded on futures in commodities, as well as the various qualities of each product. Futures on financial instruments (Financial Futures) The financial futures began trading from the 70s and in order of appearance, the assets in which they are based are the following:

* Foreign exchange
* Interest rates (debt instruments and interbank deposits)
* Stock Index

Advantages and disadvantages in hiring Futures

Advantage Disadvantages

* The futures market is often used to hedge the risk of fluctuations in spot prices before maturity.
* Futures contracts offer lower initial costs than other equivalent instruments, as it only has to deposit a security or an underlying margin much higher (more leverage).
* The existence of an organized exchange and a standardized contract terms provides liquidity and allows participants to close positions before the expiration date.
* The Clearing House guarantees at all times the liquidation of the contract. The parties will not take risks of insolvency.
* As in the forward contracts, we are exposed to the risk that our market view is not correct, especially in speculative strategies.
* If we use futures contracts as a hedging instrument we lose the potential benefits of the movement of futures prices.
* Futures contracts do not exist for all instruments or for all goods.
* To be standardized all terms of the contract may not cover exactly all the positions in cash.

Major differences between the Forward and Financial Futures

Forwards Futures Due operations Any date Standardized. The bag fixed expiration cycles Terms of Agreement Tailored to your needs
Standardized Market Many markets as sale and purchase agreements Concrete physical Headquarters Price fixing Negotiation between the parties. Quote open. (Supply and demand of the market) Price Fluctuations Price unrestricted free Fluctuation limits set by the exchange to avoid bottlenecks Value Buyer / Seller Direct or near direct (there may be broker) Anonymous Prior deposit
Unusual Required margin deposit Repurchase Assumed by both parties Undertaken by the Clearing House Contract Compliance
Physical delivery of assets Multiple payment possibilities:

* Physical delivery
* Cash settlement
* Early cancellation

Source: Institute of Banking Technique and Practice. Financial Options The options are similar to futures contracts in which only a small part of the value of underlying security needs to be paid initially. This type of transaction may lead to large gains or losses on a small investment. Features Options. One option is a contract which the holder has the following rights (but not obligations) on an asset:
# Right to acquire (if Purchase Option).
# Right to sell (if options).

The assets will be subject to a price for a period of time specified in the contract. The price paid for the option is called a premium. Option within the financial sector has many variants, both for the purpose of the business, as its easy to use, or combined with other financial instruments (futures, other options, etc.).. Option contracts have a gap to the Forward, Futures and Swaps, and that these obligations are contracted, while in the options contract is acquired the right to buy a particular asset. This asset may be an interest rate, currency, any role of fixed income and equitiy etc. Elements of Option
# Option Type: can be two types of options:
# Option to buy (call options).
# Put (put options).

Basic Options Positions Buyer Seller Call Right to buy Obligation to sell Put Right to sell Obligation to buy. Therefore, this table shows that four positions as buy or sell call options (call) or options to sell (put):
* The buyer of a call option has the right, in exchange for a premium to buy an underlying asset at the maturity date (if it is an European Option) or at any time (if it is an American option) to a price fixed by contract.
* The seller of a call option, therefore, in exchange for the perception of the premium, is obligated to sell an underlying asset at the maturity date (if it is an European Option) or at any time (if it is a American option). You are required to meet the contractual requirements of the buyer.
* The buyer of a put option has the right, on payment of a premium, to sell the underlying asset, the exercise price determined on the expiration date (if it is an European Option) or any time (if is an American option).
* The seller of a put option has the obligation, in return for the premium, to purchase the asset on the expiration date (if it is an European Option) or at any time (if it is an American option), provided at the request of the buyer of the option.

# Value Name: This will be the underlying asset. The underlying assets are diverse, trading in major markets generally various types of contracts. However, some markets specialize in certain types of options.
# Class of options:
# Currency options.
# Options on fixed income assets.
# Index options.
# Options on commodities.
# Options on Futures. (See section below *)
# Expiry date. There are two types of options in response to this criterion:

* American Option: In America you can run the right at any time.
* European Option: In Europe, the law must run on the due date.

# Exercise price of the option exercise price, compared to market price indicates whether or not to exercise the Option, indicating the possibility of making a profit. Futures Options

* In an Option to purchase (call): The holder has the right to buy futures contracts at a fixed price over a period of time or on a particular date, in exchange for paying a premium for the option price.

* Put On a (Put): The holder has the right to sell futures contracts at a set price over a period of time or on a fixed date, upon payment of a premium, as the price of Option.

Features: The essential difference between natural settings, is that they have the underlying futures contract on a particular asset.
# Options contracts are the main feature of beating without exercising, while futures contracts are offset or settled on a compulsory basis.
# Futures Options are designated by the month of the underlying futures contract, while the expiration date is located in the previous month.
# There are three ways to cancel the position in Options on Futures:
# Leave the option expires worthless.
# Compensate for the position.
# Exercise the option.

Options and Futures Market in US and Europe futures and options on equities. The asset underlying the futures and options contracts on equities is the IBEX-35. This is the official market index continued the Spanish Stock Exchange. It is a capitalization-weighted index, composed of the 35 most liquid companies from those listed on the continuous market on the four Spanish Stock Exchanges during the period of control, which is the period of six months preceding the start of a six-month period. Represents 74% of the toral of continuous market capitalization and 18% of actual volume contracted in that market.

National bond futures

The underlying asset in this case is a hypothetical bond such that they can maintain the highest correlation with most of the emissions market at the same time, being a single contract, its liquidity is higher. This bond is theoretically hypothetical notional bond issued at par to the day of expiry of contract with a term of three to ten years, as appropriate, a coupon of 10.25% and 9% respectively, and a nominal value of 10 million pesetas. The notional bond is unrelated to any title of Registered Debt market, but represents a value established theoretically and whose purpose is to serve as underlying for standardized derivatives contracts. This is as a fictional asset issued by the Treasury on the date of settlement of the transaction.

MIBOR-90 Futures: This contract complements the existing offerings of debt and long-term ranking in the short term. The underlying asset corresponds to the interest rate payable by a period of ninety days and whose rating is 10 million pesetas. The negotiation of MIBOR-90 was performed in the same way that the notional bond. The system of escrow and settlement day is the same and only vary the total deposit, which is calculated taking into account the global portfolio of futures and options, and limits the maximum daily price fluctuation. Futures exchange: Existing contracts relating to the exchange rate pesetas per U.S. dollar, with a nominal $ 100,000, and peseta / German mark, whose face is 125,000 frames. In both cases, the price is expressed in pesetas to the dollar or framework, as appropriate, establishing a minimum fluctuation of one cent penny from the nominal contracts. The maximum daily fluctuation is set at 150 cents peseta. The cash settlement is made for differences, according to the official fixing of the Bank of Spain, last trading day.

Minimum deposit as security is established in each contract based on the open position, of course less if the position is compensated.
Futures Options. Currently trading futures options on notional bonds and MIBOR-90.En all cases, the underlying asset for the future. They are American options, ie may be exercised at any time until the expiration date of the agreement, which coincides with the days of maturity of the underlying assets (third Wednesday of each month due). The premium quoted in multiples of 250 pts. in the case of interbank deposit and in multiples of hundred dollars in the bond notional. Security deposits are calculated taking into account the global portfolio of futures and options. Comparative situation between Forwards, Futures and Financial Options.

Comparison of Forwards, Futures and Financial Options

Forwards Futures Options Contract It forces the buyer and seller, It forces the seller. Contract Size Determined by the parties Standardized Due Date Determined by the parties. European option: Date of exercise coincides with the expiration date. American option, either exercise date until the date of maturity. Transaction Method. Direct contracts between the parties. Open market. Open market guarantee institution. The parties Clearing house Secondary market there is an organized market. Initial contribution and additional guarantees, According to agreements between the parties.

* Initial margin provided by the contracting parties
* Additional guarantees in terms of the evolution of market prices
* Initial margin single vendor
* Additional guarantees in terms of the evolution of market prices

Swaps and Financial Exchanges

The Swap (English word that means "change") is an innovative instrument that dates from 1981. It consists of a financial transaction between the two parties agree to exchange cash flows over a given period according to rules agreed upon. Its aim is to mitigate the swings in currencies and interest rates. They are normally used to avoid the risk associated with the granting of credit, the underwriting of fixed income (interest being fixed or variable), or currency exchange. The Swap, as part of liability management of a company, can go from one to another type of debt. Exchange techniques that provide Swap transactions allow two or more parties share the benefit of the respective advantages of each can be obtained on the different markets. This should have a dual basic rule: The parties should have direct or indirect interest in exchanging the structure of their debts and at the same time, each party gets, thanks to Swap a cost of lower duty. Major operations Swap. Currency Swap:

* It is the most common form
* Agreement between two parties to exchange their interest rate risk of fixed rates to variable or vice versa.
* Financial contract between two parties who wish to exchange your principal in different currencies for an agreed period of time. At maturity, the principal are exchanged for cash to the original type
* During the agreement, the parties pay their reciprocal interests.

Features of Economy New Financial Instruments (Risk Shift):

* It implies that both parties have an identical debt principal, but with a different financial cost
* One of them has a financial cost indicated with respect to a reference interest rate. They may be even in different currencies.
* No funds births
* It breaks the barriers of entry into international markets
* Involving parties whose principal is the same amount
* The cost of service is less than without the operation Swap
* It has contractually requiring the payment of mutual interests
* Retains the liquidity requirement
* It is usually done through intermediaries


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