“Futures” can refer to a couple of different concepts, primarily related to finance and derivatives trading. Let’s explore both of these concepts:
1. Futures Contracts:
A futures contract is a standardized financial contract between two parties to buy or sell an asset at a specified future date, for a price agreed upon today. The asset in question can be commodities (like oil, gold, agricultural products), financial instruments (like stock indices, currencies), or even intangible assets (like interest rates). Futures contracts are traded on exchanges and serve several purposes, including risk management and speculation.
For instance, if you’re a farmer, you might be concerned about the price of wheat dropping before you can sell your crop. You could enter into a wheat futures contract to lock in a price now, even though you won’t actually deliver the wheat until a later date. Similarly, investors and traders might use futures contracts to speculate on price movements, either to profit from price increases or decreases.
2. Futures Studies:
“Futures” can also refer to a field of study known as “futures studies” or “futurology.” This is an interdisciplinary field that explores and anticipates possible future developments in various aspects of society, technology, environment, and more. Futures studies involve methods like scenario planning, trend analysis, and speculative thinking to help individuals and organizations prepare for potential future challenges and opportunities.
It’s important to clarify the context in which you encountered the term “futures” to determine whether it’s referring to financial contracts or the broader study of future possibilities.
So what do you need to pay attention to in futures trading? The following are the main points in futures trading:
1. Underlying assets:
Futures contracts specify the underlying assets, which can be commodities (such as gold, oil, agricultural products), financial instruments (such as stock indexes, interest rates), or even weather events.
2. Contract specifications:
Futures contracts have standardized terms, including the contract size, expiration date, and the price at which to buy or sell the asset on that date.
3. Expiry date:
Each futures contract has a specific future expiration date. On this date, the contract is settled by physical delivery of the underlying asset (for commodities) or by cash settlement (for financial instruments).
4. Long and short positions:
A trader can take a long position (agreeing to buy an asset at a specified price) or a short position (agreing to sell an asset at a specified price). If traders expect prices to rise, they take long positions; if they expect prices to fall, they take short positions.
5. Margin Requirements:
Futures trading involves the use of leverage. Traders are required to deposit initial margin (a fraction of the total contract value) to open a futures position. This allows traders to control large positions with relatively small investments.
6. Mark-to-Market:
The value of a futures contract is recalculated daily based on current market prices. The profit and loss are settled daily, and the loser pays the winner.
7. Hedging:
One of the main purposes of futures contracts is to manage risk. Businesses that depend on certain commodities can use futures to lock in prices and protect themselves from price fluctuations. For example, farmers might use futures to determine the price of crops before they are harvested.
8. Speculation:
Traders who believe they can predict price movements can use futures contracts to speculate and potentially profit from those movements. However, the leverage involved also means that losses can be substantial.
9. Extension period:
Traders who do not intend to receive the underlying asset can close their positions before the expiration date and enter into a new contract with a later expiration date. This is called a “rollover” futures position.
It is worth noting that futures trading involves a degree of risk as it can result in large gains and losses. Therefore, individuals are advised to fully understand the mechanics and risks associated with futures trading before participating in futures trading.
