What Is a Futures Contract? A Detailed Guide for Investors

Although futures contracts have existed for a long time in international markets, for Vietnamese investors, this remains a relatively new and promising field. Since 2018, when the Vietnam Securities Exchange officially allowed the listing of VN30 index futures contracts, the number of investors participating in this instrument has increased significantly. However, many investors still do not fully understand the operating mechanism, potential risks, and how to manage positions in futures contracts.

This article will provide you with a comprehensive overview of futures contracts — from basic concepts, trading characteristics, to comparisons with other derivatives such as CFDs.

Key Features of Futures Contracts in the Derivatives Market

Before learning how to trade, investors need to grasp the main characteristics of futures contracts:

◆ High Standardization: Each futures contract is set with fixed parameters — the traded asset type, volume, agreed price, and expiration date. This ensures transparency and easy management for all participants.

◆ Backed by Regulatory Authorities: Futures contracts are listed and guaranteed by derivative securities exchanges, minimizing liquidity risk and ensuring contract performance.

◆ Daily Clearing Mechanism and Margin Requirements: To protect both parties’ interests, investors must deposit a certain amount of margin. Daily, gains and losses are calculated based on the market price compared to the contract price. If losses exceed the margin, investors will be required to top up their accounts.

◆ Strong Financial Leverage: This is one of the most attractive points of futures contracts. You only need to pay a small portion of the contract’s value as margin to trade the entire value. As a result, profits can be 4-5 times higher than the actual price movement of the asset.

Futures Contracts: From Risk Prevention to Speculative Tools

Origin and Initial Purpose

Futures contracts originated from the needs of traders to manage price risks. For example, airlines need to purchase fuel continuously, but fuel prices fluctuate unpredictably. To avoid losses from sudden price increases, they enter into futures contracts with suppliers, agreeing on a purchase price at a future date.

Expansion to Other Asset Types

Today, futures are no longer limited to commodities like crude oil, rice, or fruits. With increasing risk management needs from stock investors, futures have expanded into securities, cryptocurrencies, gold, and many other assets.

Trading Mechanism: Long and Short Positions

Two Basic Positions

Futures trading operates based on two main positions:

Buy (Long): You agree to buy the asset at contract expiration. You profit when prices rise.

Sell Short (Short): You agree to sell the asset at contract expiration. You profit when prices fall.

Real Example: Brent Oil Trading

Suppose you trade a Brent oil futures contract (UKOIL) with the following parameters:

• Volume: 1000 Barrels
• Expiration date: 10/31/2020
• Agreed price: $43/Barrel

Scenario 1 - Long Position (Expect Price Increase): You forecast oil prices will rise by the end of October, so you open a Long position. On 10/20/2020, Brent oil price increases to $44. You decide to close the position immediately and collect $44,000 (compared to $43,000 initially), earning a $1,000 profit.

Scenario 2 - Short Position (Expect Price Decrease): You forecast oil prices will fall, so you open a Short position to sell 1000 barrels. On 10/20/2020, the price drops to $42. You buy back the contract at $42,000 (instead of $43,000), earning a $1,000 profit.

Potential Risks When Trading Futures Contracts

Risks from Financial Leverage

Although leverage can amplify profits, it also significantly magnifies losses. For example, using 1:10 leverage, a 5% adverse price movement can wipe out 50% of your initial margin.

Risks from Daily Clearing

Gains and losses are calculated and settled daily. If the asset price fluctuates strongly in a day against your position, your account will record a loss immediately. If the margin is insufficient, you must deposit more to maintain the position or face contract termination.

High Speculative Risk

Futures contracts do not generate real economic value (no increase in production or actual supply and demand). Their ease of opening/closing positions makes them powerful speculative tools with very rapid price movements.

Comparing Futures Contracts with CFDs

CFD (Contract for Difference) is also a derivative instrument, but with important differences compared to futures:

Choosing the Suitable Instrument:

• CFD is suitable for high-risk-tolerance investors with small capital who want short-term trading.
• Futures are suitable for large investors, those intending long-term risk management, or genuinely exchanging assets.

Conclusion

Futures contracts are valuable derivatives instruments, capable of both hedging against price volatility for large commodity or stock investors and serving as short-term speculative tools. With features like standardization, backing by regulatory authorities, and daily clearing mechanisms, futures offer higher safety and transparency compared to many other derivatives.

To succeed in futures trading, investors need to understand the operating mechanism, manage risks carefully, and only use leverage within their risk tolerance. We hope the information in this article provides a solid foundation for choosing the right investment tools aligned with your goals and financial capacity.