## Understanding Futures Contracts: From Mechanisms to Investment Strategies

**Futures contracts are an important derivative tool**, but many Vietnamese investors still find this type of security unfamiliar. Although they have been used globally for a long time, in Vietnam, futures contracts only began to be widely known from 2018 when the Vietnam Securities Exchange allowed trading of the VN30 index futures. However, the number of investors participating in this field remains limited, mainly due to a lack of understanding of how they operate and how to apply effective trading strategies.

## Origin and Practical Applications of Futures Contracts

Before becoming a modern financial trading tool, futures contracts originated from the practical needs of merchants. They needed to make agreements to protect themselves against price fluctuations of commodities such as crude oil, rice, or agricultural products.

A typical example is airlines. These companies need to purchase large amounts of fuel daily, but oil prices are constantly fluctuating unpredictably. To minimize risks when oil prices suddenly rise, airlines often sign futures contracts with suppliers to lock in prices at pre-agreed levels.

Today, futures contracts are no longer limited to physical commodities. Any traded asset—from stocks, cryptocurrencies, gold to crude oil—has corresponding futures contracts.

## How It Works: Two Basic Positions

When trading futures contracts, investors have two main position options:

**Long Position (Buy):** You agree to buy the asset at the contract's expiration date. This strategy is suitable when you forecast the price will rise.

**Short Position (Sell short):** You commit to sell the asset at the expiration date. This is a way to profit when you expect the price to fall.

###Illustrative Example

Consider a Brent oil (UKOIL) futures contract with the following details:
- Asset: Brent Oil (UKOIL)
- Expiration date: 31/10/2020
- Quantity: 1000 Barrels
- Trading price: $43/Barrel

**Scenario 1 - Opening a Long Position:** You predict oil prices will increase by the end of October, so you buy 1000 Barrels at $43. On 20/10/2020, the oil price rises as forecasted. If you sell the contract now, you receive $44,000, earning a $1,000 profit.

**Scenario 2 - Opening a Short Position:** You predict oil prices will decrease, so you short 1000 Barrels. On 20/10/2020, the price indeed drops to $42. You buy back the contract at $42,000 instead of $43,000, earning a $1,000 profit.

## Key Features of Futures Contracts

**High Standardization:** Each contract clearly specifies the asset, quantity, price, and expiration date, with no individual negotiations.

**Official Listing:** Futures are managed by the Derivatives Securities Exchange, ensuring reliability and transparency.

**Margin System and Clearing:** To ensure both parties fulfill their commitments, investors must deposit margin. Daily, gains and losses are calculated based on market prices, and if losses are too large, additional margin deposits are required.

**Financial Leverage:** You only need to pay a small part of the contract value $44 margin( to trade the entire value. This means profits can be 4-5 times the actual price movement, but losses are also amplified.

## Risks When Investing in Futures

**Leverage Risks:** Although leverage can multiply profits, it also magnifies losses. With a 1:10 ratio, a 5% adverse price movement can wipe out 50% of your initial margin.

**Daily Settlement:** Gains and losses are settled daily. If the market moves unfavorably, your account will record a loss immediately. If your margin is insufficient, you must deposit more to maintain your position.

**High Speculative Nature:** Futures do not create intrinsic value but only reflect price movements. Their ease of opening/closing positions makes them a tool for speculation with rapid volatility.

## Comparing Futures with CFDs

CFD )Contract for Difference( is also a derivative instrument, combining features of futures and spot trading. Here are the main differences:

| Criterion | CFD | Futures Contract |
|------------|-----|------------------|
| **Trading Venue** | OTC Market )non-official( | Derivatives Securities Exchange |
| **Leverage** | High | High |
| **Expiration Date** | None | Yes |
| **Contract Size** | Flexible )small to large( | Fixed large size |
| **Trading Fees** | Overnight holding fees, spread | Brokerage fees, management fees |

**Advantages of CFDs:**
- Lower minimum capital requirements
- No fixed expiration date, flexible trading
- Can trade many asset types

**Disadvantages of CFDs:**
- Very high speculative risk
- Requires constant market monitoring
- Higher initial capital needed for significant profits

**Advantages of Futures:**
- Officially managed, ensuring liquidity
- Suitable for investors with actual trading plans
- Useful for hedging against price volatility

**Disadvantages of Futures:**
- Large initial capital requirement
- Need accurate forecasting within a set timeframe
- Third-party fees may apply

## Conclusion

Futures are powerful derivative tools serving two main purposes: risk management for large-scale commodity/stock investors, or short-term speculation. The choice between futures and CFDs depends on capital, objectives, and risk tolerance of each investor. Regardless of the option, understanding mechanisms, risks, and capital management is crucial for success in derivative trading.