Futures are financial derivatives that obligate the buyer to purchase, and the seller to sell, an underlying asset at a predetermined price on a specified date. These contracts are typically traded on exchanges and are used by investors to hedge against potential price fluctuations or to speculate on price movements. Futures are marked to market daily, meaning that profits and losses are calculated at the end of each trading day, allowing for real-time management of risk and capital. Commonly traded futures include commodities like oil and wheat, as well as financial instruments like stock indices and currencies.
Future Example
For example, a trader who believes that the price of corn will increase might buy a futures contract at $5 per bushel. If the price of corn rises to $6 per bushel at the contract’s expiration, the trader can sell the contract for a profit of $1 per bushel. Conversely, if the price drops to $4 per bushel, the trader would face a loss of $1 per bushel.