Trading mechanism of future, Financial Management

Trading Mechanism Of Future:

Flow of the Order

Any person who wants to trade in futures has to contact a Futures Commission Merchant (FCM) or a broker. First, let us look at an FCM. He is necessarily a member of the clearing house. The next step is to open an account at his firm. The account holder will be assigned to one of the Accounts Executives, who will look after his transactions. Whenever the account holder places an order with the accounts executive, he will note down the order specifications and immediately transmits it to one of the floor brokers at the exchange. The floor broker will execute the order and report the transaction to the clearing house. Once he receives the confirmation from the clearing house, he calls back the accounts executive giving him all the details about the trade. The accounts executive, in turn, will pass these details to his client.

Other responsibilities of the FCM is to maintain all the records and to report the trading activity of all his clients to the clearing house and sending the clients monthly statements about their position and account balances.

To Open the Account with a Broker

The broker may or may not be a member of a clearing house. If he is a member of a clearing house, he notes down the specifications and transmits the order to the floor broker who, as mentioned above, executes it, confirms it from the clearing house and sends back the details to the broker, who then conveys the same to his client. In case, he does not happen to be a member of the clearing house, he should necessarily route the order through a member. Once he does so, the remaining procedure will be the same as above.

The investor who wants to trade futures can be a hedger, a speculator or an arbitrager. These are defined below.

Hedgers

Hedgers deal in futures to offset a pre-existing risk. The commodity is usually the one they produce or use in the course of their business.

Speculators

Speculators take long or short positions only with the intention of making profits by getting out of the market when conditions favor them. As with the other markets, speculators play an important role in futures market also. In the process, they assume risk which is disproportionate to the returns they are expecting.

Arbitragers

Arbitragers try to exploit the discrepancy between prices in two different markets. This activity is termed as arbitration. In the context of futures market, this treading has a special income spread trading.

Futures Commission Merchant

By this time it should be clear as to what role the FCM plays. Its role is similar to that of a brokerage house in a stock market. Investors interested in dealing in futures may also put through their deals through the contacting agents of FCM. These agents do not accept money from the investors. The agents are also called introducing brokers. The bulk of the business is carried out by FCMs only.

 

Posted Date: 9/10/2012 8:50:06 AM | Location : United States







Related Discussions:- Trading mechanism of future, Assignment Help, Ask Question on Trading mechanism of future, Get Answer, Expert's Help, Trading mechanism of future Discussions

Write discussion on Trading mechanism of future
Your posts are moderated
Related Questions
IMPORTANT FACTORS FOR  SUCCESSFUL BUDGETARY CONTROL 1. Clearly defined organization structure. 2. Top management support. 3. Reporting of deviations 4. Efficient acco

Under what circumstances is a warrant's value high ?  Explain. A warrant's value would be elevated when the stock price, time to expiration, and/or expected stock price volatil

Q. Cost of capital? The terms of cost of capital refers to the minimum rate of the return a firm must earn on its investment so that the market value of the company equity shar

High-yield bonds are issued by organizations that do not qualify for "investment-grade" ratings by any one of the leading credit rating agencies

what is leverage

given just the sales and profit values, how is the break-even sales calculated?

Discuss the advantages and disadvantages of the gold standard. Answer:  The benefits of the gold standard include: (I) as the supply of gold is restricted, countries cannot compr

What is Financial Management? Anybody can describe it.

Explain about the market-based and bank-based systems. A clear distinction between market-based in USA and UK and bank-based systems as in Germany, Japan and France define by s

Issuing Procedure Treasury bills are sold using the auction procedure. The Treasury entertains both competitive and non-competitive tenders for T-Bills. Government securities f