What Is A Futures Contract – Understand With Examples


Here are a few examples of the futures contract.

Take for example a situation where you enter into an agreement with your cable TV operator to pay him $100 a month for the next year for the services that he provides. You have basically locked in a price and thus even if the cost of offering this service to you increases you still pay just $100 as per the agreement for the tenure of the agreement period.

This is similar to the financial market futures contract. The buyer sets the purchase price well in advance and this saves him from the volatility in the market. Thus in case, there is a rise in the price of the services offered then this does not affect him since he still pays the contract amount. In the financial market, the trader will have a bias whether the asset price should rise or fall in the future. If the trader believes that the price of the asset will rise then he buys a futures contract of the underlying asset. If he believes that the price of the asset will fall then he sells the futures contract of the underlying asset.

In the financial market, let us assume that the trader buys an index futures contract at a set price. This price is guaranteed till the expiration of the futures contract. So if the price of the futures contract goes above the set price you will be able to sell the contract and the difference between the price is your profit. If the price were to fall below the set price then this a loss trade and the loss is the difference of the set price and the price of the futures contract.

Assets that can be traded using the futures contract

The financial market is growing and is also becoming diverse. There is today a wide range of asset classes that can be traded using futures. The major asset classes can be traded using the future contract. This includes stocks, commodities, currencies, and indexes. This is important to know so that the traders can look at other asset classes to trade in the futures contract and thus diversify their portfolio. This will let them tap other market opportunities as well.

Learn more about how to trade on the futures contract. Futures contract magnifies your profits and losses because of leverage so it is important to size your positions accordingly.



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