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What Are Futures Contract and How Do They Work?

By News Canvass | Nov 26, 2022

A futures contract is a written agreement that specifies the sale and purchase of a particular good, asset, or security at a future price and time. Futures contracts are standardized to ensure quantity and quality to make trading on the futures exchange easier.

The buyer of a future contract is required to acquire and/or receive the underlying asset prior to the contract’s expiration. When the futures contract is exercised, the seller of this contract has responsibility for providing and delivering the asset upon which it is based to the buyer.

Futures contracts give investors the chance to predict the future movement of the underlying assets, such as commodities, securities, or financial instruments.

These contracts are frequently bought in an effort to protect losses from particularly unfavourable price swings by hedging the movements of the underlying asset’s price.

Futures contracts are financial agreements that have a derivative aspect and provide for the exchange of an asset between the parties at a fixed future time and price. Futures Trading is the practice of trading using futures contracts.

In accordance with the rules of futures trading, regardless of the current market price or the asset’s expiration date, a buyer must buy while a seller sells the underlying asset at a fixed price. The quantity at which the underlying asset is standardized to enable trading on a futures exchange is also specified in future contracts.

Future contracts are the same thing as “futures,” according to popular usage. You might hear someone say, for instance, that they bought oil futures, which is the same as buying an oil futures contract. When someone uses the term “future contract,” they frequently mean a specific kind of futures, such as futures on S&P 500 index, gold, bonds, or oil.

A futures contract is standardized, in contrast to a forward contract. One will have to lock in their pricing as per that unit or in multiples of it, for instance, whenever a contract specifies that it applies to 1000 barrels of oil. One would have to sell or buy one hundred different contracts in order to lock down a price. One would need to purchase or dispose of a thousand such contracts in order to fix the price of a million barrels of oil. Additionally, traders effectively predict what a stock’s futures price or index value will likely be.

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