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Futures Contracts

Futures Contracts

What is a Futures Contract?

A Futures Contract is a derivative product and it is a contract between two parties where both parties agree to buy and sell a particular asset of a specific quantity and at a predetermined price, at a specified date in the future. These financial instruments are frequently used by both hedgers and speculators as a way to potentially anticipate future price movements, either for hedging against risks or for making profits. Futures trading is indeed a highway to financial freedom, but it is never a shortcut. What you need is to learn from experience and foster your own trading mechanism.
The number of units of an asset that shall be bought or sold and the time at which the transaction will happen are specified in the futures contract. The settlement happens when the contract reaches its expiration date. During this time, the trader who holds the futures is required to buy or sell the asset for the agreed price.
Some traders exit their positions before the expiration date of the futures. Here are some of the methods they use:
  1. 1.
    Offsetting – The trader closes a position by making another of equal size and value.
  2. 2.
    Rollover – Traders roll over (extend) their positions before the contract expires.
  3. 3.
    Last is to wait for the contract’s expiration in which both parties are required to buy or sell the underlying asset for an agreed-upon price.