What's a Future
A futures contract is an agreement to buy or sell a specific quantity of a commodity, financial instrument, or other asset at a predetermined price at a specified time in the future. These contracts are traded on futures exchanges, such as the CME, which act as a marketplace between buyers and sellers.
Here are some key features of futures contracts:
Standardization: Each futures contract is standardized by the exchange in terms of the quantity, and delivery time and location for the underlying asset.
Margin Requirements: Futures contracts require a margin deposit, which is a fraction of the total contract value. This serves as a performance bond to ensure that each party can fulfill their financial obligations under the contract.
Marking to Market: The value of a futures contract is marked to market daily. This means the contract's gains and losses are settled at the end of each trading day, with money transferred between the buyer's and seller's accounts to reflect the contract's current market value.
Leverage: Since only a margin deposit is required to buy or sell a futures contract (rather than the full value of the underlying asset), futures can provide significant leverage. This means that small price movements can lead to large profits or losses relative to the margin amount.
Hedging and Speculation:
Hedging: Businesses and investors use futures contracts to hedge against price changes in commodities, currencies, or financial instruments. For example, a farmer might use futures to lock in a price for a crop to protect against a drop in market prices by the time the crop is harvested and sold.
Speculation: Traders and investors might buy and sell futures contracts to profit from anticipated price movements of the underlying asset, without any intention of taking delivery of the physical commodity or asset.
Obligation to Buy/Sell: When a futures contract is held to expiration, the buyer is obligated to purchase, and the seller is obligated to deliver the underlying asset at the agreed price, unless they close their positions earlier in the trading period.
Regulation: In the US, futures trading and exchanges are regulated by the Commodities Futures Trading Commission (CFTC).
Futures are used across various sectors including agriculture (e.g., wheat, corn, soybeans), energy (e.g., crude oil, natural gas), metals (e.g., gold, silver), and financial instruments (e.g., stock indices, interest rates). For the full list of futures products and exchanges that Architect supports, visit Available Products.
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