Futures
| Futures contracts are legal agreements between two parties that state that an asset must be purchased at a predetermined date in the future for a predetermined price. Futures contracts are often used in commodities trading, where commodities are physical goods like oil, corn, or gold. When a futures contract is created, the buyer and seller agree on a price for the commodity that will be delivered at a future date. The price is set at the time the contract is created, but the actual exchange of the commodity takes place at the future date. Futures contracts are used because they provide certainty to both the buyer and the seller. The buyer knows that they will receive the commodity they want, and the seller knows that they will receive the price they want. Futures contracts are traded on futures exchanges. The most well-known futures exchange in the United States is the Chicago Mercantile Exchange (CME). Futures exchanges are regulated by the government to ensure that they are fair and transparent. When a futures contract expires, the buyer and seller must exchange the commodity for the agreed-upon price. If the price of the commodity has gone up, the seller makes a profit, and if the price has gone down, the buyer makes a profit. Futures contracts are a way to hedge against risk. For example, if a farmer is worried that the price of corn will go down before they are able to sell their crop, they can buy a corn futures contract. If the price of corn does go down, the farmer will still receive the agreed-upon price for their corn. Futures contracts can be used for speculation. Speculators bet on the future price of a commodity, and if they are correct, they can make a profit. Futures contracts are a tool that can be used to manage risk and make profits. |
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