What are futures? information
Futures are financial contracts that obligate the buyer to purchase, and the seller to sell, an asset at a predetermined price on a specific future date. They are commonly used for commodities, such as oil or wheat, as well as financial instruments like stock indices or currencies.
Key features of futures include:
Standardization: Futures contracts are standardized in terms of contract size and expiration dates, making them easily tradable on exchanges.
- Leverage: Futures allow traders to control a large position with a relatively small amount of capital, increasing potential profits (and risks).
- Hedging: Businesses and investors use futures to hedge against price fluctuations, locking in prices for future transactions.
- Speculation: Traders often use futures to speculate on price movements, aiming to profit from changes in the market.
- Settlement: Futures can be settled in cash or through physical delivery of the underlying asset at expiration.
Overall, futures are a versatile tool in trading, offering both opportunities and risks for investors.
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Market Solution
One use of a futures contract is to allow a business or individual to navigate risk and uncertainty. Prices are always changing, but with a futures contract, people can lock in a fixed price to buy or sell at a future date. Locking in a price lessens the risk of being negatively impacted by price change.
Futures are a common vehicle for hedging and managing risk; If someone is already exposed to or earns profits through speculation, it is primarily due to their desire to hedge risks.
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