What is a futures contract?

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Futures contracts, often known as futures, are financial derivatives in which the parties agree to trade an asset at a specified future price and date. Despite the prevailing market price at the expiry date, the seller or buyer should acquire or sell the underlying asset at the pre-determined price.

Physical commodities and other financial instruments are examples of underlying assets. Futures contracts indicate the quantity of the underlying asset and they are standardized to simplify futures trading. Futures contracts can be utilized for trade speculation or hedging.

The term “futures” is used by investors and traders to refer to the entire asset class. A futures contract buyer, on the other hand, must take ownership of the underlying commodity at the moment of expiration and not earlier. A buyer of a futures contract has the option to sell their position before it expires, releasing them from their obligation.

The benefits of having a futures contract:

  • Companies can protect themselves from price fluctuations by hedging the price of their raw materials or the items they sell.
  • Futures contracts letinvestors speculate on anunderlying asset’sprice direction.
  • Investors have the same ability to sell contracts as they do to buy them.
  • Futures contracts may just require a portion of the contract’s value to be deposited with a broker.

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Pieter Borremans
By Pieter Borremans

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