Reviewed by Vishnava | Updated on Feb 01, 2023


Introduction to futures

A futures contract is a predetermined contract on the present date made between two parties that don’t know each other, to transact a commodity or a financial instrument at a set price on a future date. This contract comes into force despite the present circumstances. The commodity’s delivery and payment is made on the futures date at the predetermined price. A buyer in such a contract is called ‘having a long position’ or in the ‘long,’ while the seller is said to be in the ‘short.’

Understanding Futures

  • A futures contract specifies the details of the transactions to be held, thereby standardizing on a futures exchange where the transaction occurs on the agreed date. Such a contract enables the investor to speculate the direction of the price of that commodity or instrument, thereby hedging the price. If the price of the agreed asset class seems set to fall or will be unfavourable, the investor will be making a profit due to the pre-agreed price, or vice versa.
  • Futures are derivative financial contracts that can be made on stocks, commodities, indices, metals like gold and silver, bonds, currencies and more. The buyer and seller are entering an obligation to buy and sell the asset on the agreed date at the price decided respectively.
  • Trading with futures trading eliminates the necessity to own the underlying asset i.e. you don’t need to own the asset if you are the buyer, not until the date of expiration comes. If you don’t want to hold that obligation, you can rid yourself of it before the expiration as well. These contracts are always carried out on a mass scale of quantity, which demands a deposit as a margin with the broker. Minimal margins ensure that if the price is favourable, the profits are huge. In case they’re not, then you won’t also lose too much money.

Highlights of Futures

  • Margins are leverages in these contracts.
  • Futures markets fluctuate violently on a daily basis, and with the margin, investors can continue to chase prices favourable to them and square up on contracts for various durations.
  • Contracts can be replenished time whenever the margins are used up to settle the daily price differences in the market.

Related Terms

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