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What is a future or financial derivative?

Let's start by looking at what they are: they are assets that based on other assets (called underlying assets). This means that they are derivative products. Also: Ibex 35 futures are assets referenced to this index; in which case, the underlying asset would be the Ibex itself.

In addition to the buyer (i.e. the party who undertakes to buy the asset when the contract matures) and the seller (i.e. the party who sells the asset when the contract matures), there is the clearing house or counterparty, which will ensure that the contract is concluded, thus guaranteeing the clearing of payments and eliminating counterparty risk (the risk of the other party to the transaction not fulfilling its obligation).

Futures are an evolution of forward contracts in the sense that they are standardised and open to continuous and regulated trading. The very name "future" refers to the fact that each party commits to buy or sell at a certain price at a "future" point in time. This future point in time is the maturity, and most commonly there are monthly or quarterly maturities.

Each futures contract replicates its underlying in a "leveraged" manner. This means that we will not have to pay the full amount of the transaction, but a much smaller amount as collateral. In addition, we must take into account the size of the contract and the multiplier. For example, the Ibex Plus Future replicates the behaviour of the IBEX index, but each point of movement of the index represents a €10 gain or loss on the futures contract.

In addition, the fact that its trading is standardised and continuous means that it will not be necessary to wait for the maturity and we can close our position at any time, executing at the price at which it is quoted at that time.

In view of all this, we can surmise the characteristics of these contracts as: First, that the seller can sell without having to have bought; they can be bought or sold at any time; the price and maturity are known to both parties; the price involves risk; and that counterparty risk is avoided through the binding nature of the transaction and the presence of the clearing house.

These derivatives are traded on their own market, the Spanish Financial Futures Market (MEFF). Each day open positions are liquidated, so if for example we buy at 10,200 points and the future closes at 10,300, that difference of 100 points will be credited to our account.

Despite that, it is a market that is on the rise among professional investors, traders and also small customers.



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