How to start trading forward and futures contracts on Binance?

Open Binance’s Futures Account

To start trading forward and futures contracts with Binance, you need to open a Futures Contract Account.

Go to the registration page below.

Open Binance Real Account

There are mainly 4 types of futures contract you can trade on Binance.

USDⓈ-M Futures

Perpetual or Quarterly Contracts settled in USDT or BUSD.

COIN-M Futures

Perpetual or Quarterly Contracts settled in Cryptocurrency.

Binance Leveraged Tokens

Enjoy increased leverage without risk of liquidation.

Binance Options

Crypto Options made simple. Limited risk and unlimited profits.

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What are forward contracts and futures contracts?

Essentially, forward and futures contracts are agreements that allow traders, investors and commodity producers to speculate on future asset prices. These contracts can act as a promise between two parties that an instrument will trade on a future date (expiration date) at the price agreed upon when the contract was created.

The underlying financial instrument for a forward or futures contract can be any asset, such as equity, commodities, currencies, interest payments or even bonds.

But unlike forward contracts, futures contracts are standardized contracts (as legal agreements) from a contract point of view, and are traded on a specific venue (a futures contract trading platform). Therefore, futures contracts are governed by a specific set of rules, which may include, for example, contract size and daily interest rates. In many cases, futures contracts are executed under the guarantee of a clearing house, which allows parties to trade with low counterparty risk.

Although the original form of futures market was formed in Europe in the 17th century, Dojima Rice Club (Japan) is considered to be the first futures exchange established. In Japan in the early 18th century, most payments were made in rice, so futures contracts began to be used to hedge against the risk of volatile rice prices.

With the advent of electronic trading systems, futures contracts and a range of use cases became common across the financial industry.

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Functions of futures contracts

Futures contracts in the context of the financial industry usually have some of the following functions:

Hedging and Risk Management:

Futures contracts can be used to mitigate specific risks. For example, despite adverse events and market volatility, farmers can sell futures contracts on their products to ensure that they can sell their products at a certain price in the future. Alternatively, a Japanese investor holding U.S. Treasuries can hedge his U.S. dollar exposure by purchasing a JPY/USD futures contract equal to the quarterly coupon payment (interest rate) amount, locking in the JPY value of the coupon at a predetermined rate.

Leverage:

Futures contracts allow investors to take leveraged positions. Since the contract settles on the expiration date, investors can use leverage to take a position. For example, a trader using 3:1 leverage can open a position that is three times the balance of his trading account.

Short exposure:

Futures contracts allow investors to gain short exposure to an asset. An investor decides to sell a futures contract without owning the underlying asset, a situation often referred to as a “naked position.”

Asset diversification:

Investors have access to assets that are difficult to trade in spot. Commodities such as oil are often expensive to deliver and involve high storage fees, but by using futures contracts, investors and traders can speculate on a wider range of asset classes without physically trading.

Price Discovery:

The futures market is a one-stop shop for buyers and sellers (i.e., a meeting point for both the supply and demand sides) for trading multiple classes of assets, such as commodities. For example, the price of oil may be determined by real-time demand in the futures market rather than by local interactions at gas stations.

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Settlement mechanism

The expiration date of a futures contract is the last day of trading activity for that particular contract. After the expiration date, trading stops and the contract is settled. There are two main settlement mechanisms for futures contracts:

Physical settlement:

The exchange of the underlying asset at a pre-determined price between two parties signing a contract. The party who goes short (sell) is obliged to deliver the asset to the party who goes long (buy).

Cash Settlement:

Does not directly trade the underlying asset. Rather, one party pays the other an amount that reflects the current value of the asset. A typical example of a cash-settled futures contract is an oil futures contract, which exchanges cash rather than barrels of oil because actually trading thousands of barrels of oil is quite complicated.

Cash-settled futures contracts are more convenient than physically-settled contracts, even for liquid financial securities or fixed income instruments where ownership can be transferred fairly quickly (at least compared to physical assets such as barrels of oil) and are therefore preferred.

However, cash-settled futures contracts can lead to price manipulation of the underlying asset. Such market manipulation is often referred to as “manipulating the close,” a term that describes unusual trading activity that deliberately disrupts order books as a futures contract approaches its expiration date.

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Exit Strategies for Futures Contracts

After holding a futures contract position, a futures trader can perform three main actions:

Closing:

Refers to the act of closing a futures contract by creating an opposite trade of the same value. Therefore, if a trader is short 50 futures contracts, he can open a long position of the same size, offsetting his initial position. Offset strategies allow traders to make a profit or suffer a loss before the settlement date.

Rollover:

A rollover occurs when a trader decides to open a new futures contract position after offsetting their initial contract position, essentially extending the expiration date. For example, if a trader was long 30 futures contracts expiring in the first week of January, but wanted to extend the position by 6 months, he could offset the initial position and open a new position of the same size, setting the expiry date to for the first week of July.

Settlement:

If the futures trader does not close out or roll over, the contract will settle on the expiry date. At this point the parties are legally obliged to trade assets (or cash) based on their positions.

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Price patterns of futures contracts: contango and backwardation

From the moment a futures contract is created until settlement, the market price of the contract changes continuously with the buying and selling power.

The relationship between the expiry date of a futures contract and price changes produces different price patterns, commonly referred to as contango (1) and backwardation (3). These price patterns are directly related to the expected spot price (2) of the asset at expiration (4), as shown in the chart below.

Contango (1):

A market condition in which the price of a futures contract is higher than the expected future spot price.

Expected spot price (2):

The expected asset price at settlement (expiration date). Note that the expected spot price is not always constant, i.e. the price may change as market supply and demand change.

Spot premium (3):

A market condition in which the price of a futures contract is lower than the expected future spot price.

Expiration Date (4):

The last day on which trading activity is available for a particular futures contract prior to settlement.

While contango market conditions tend to be more favorable for sellers (short positions) than buyers (long positions), contango markets are generally more favorable for buyers.

Futures contract prices are expected to gradually converge towards the spot price as the expiration date approaches, until the two are eventually equal in value. If the price of the futures contract and the spot price are inconsistent on the expiration date, traders can take advantage of arbitrage opportunities to make quick profits.
When contango occurs, futures contracts trade above the expected spot price, usually for convenience. For example, a futures trader might decide to pay a premium for a physical commodity that will be delivered at a future date so they don’t have to worry about paying for things like storage and insurance (gold is a prime example). In addition, companies can lock their future spending at predictable values ​​through futures contracts, buying commodities that are integral to providing their services (e.g., a baker’s purchase of wheat futures contracts).

On the other hand, a backwardation market occurs when a futures contract trades below the expected spot price. Speculators who buy futures contracts hope to profit when prices rise as expected. For example, the expected spot price for a barrel of oil next year is $45, and a futures trader might buy a barrel of oil contract today at $30 a barrel.

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Summary

As a standardized forward contract, the futures contract is one of the most commonly used instruments in the financial industry, and its versatility makes it suitable for a wide range of use cases. But before investing your money, be sure to learn more about the basic mechanics of futures contracts and their specific markets.

While “locking in” future asset prices can be useful in some cases, it is not always safe, especially when trading contracts on margin. Therefore, risk management strategies are often required to mitigate the unavoidable risks associated with trading futures contracts. Some speculators also use technical analysis indicators as well as fundamental analysis methods to understand price action in the futures market.

Open Binance’s Futures Account