What are futures? Definition and example

What are futures? Definition and example

Out of all the ways a trader can earn money, nothing beats derivatives. Derivatives are market instruments with high volatility, that make any trader’s dream of earning profits true. Accordingly, to its name, the futures contract allows traders to purchase and sell any asset or financial instrument at a future date

The price of this instrument is predetermined. It means that the price at which two parties would execute the transaction gets fixed beforehand. 

What are futures? – The definition

The future is a type of derivative contract. In this contract, the buyers and sellers execute a deal at a predetermined price. However, the execution date of the deal is sometime in the future

Execution time in the future

Some points that explain futures in a better way are as follows:

  • Traders who execute this deal must stay faithful to the earlier fixed prices. 
  • The futures contracts stay unaffected by the change in an asset’s price over time. 
  • Even if the current market price of an asset rises, it does not affect the future deal. 
  • Market changes are not significant in such deals. 
  • Futures contracts get executed at their expiry. 
  • There are several assets that traders can buy and sell under options contracts. All stocks, commodities, and physical assets can involve in the futures contract deal. 

Traders trade futures contracts because it allows them to speculate and earn more. The chances of earning high profits are manifold if traders can tap the right trading strategies with these derivatives. 

More about futures 

Most traders involve themselves in futures deals because it allows them to lock in their deals. They can lock in the price of the underlying asset or commodity they wish to trade. Unlike binary options (definition) that judge the asset’s price on its expiry, futures have a predetermined price. However, their expiration dates are known just like the binary options. 

There are not one but several futures contracts available in the market, in which investors participate. Traders deal in futures to speculate and earn according to their potential. 

  • Crude oil, corn, and natural gas are some important kinds of underlying assets in options trading. 
  • Currency and precious metals can also get traded as underlying assets in futures trading. 
  • Several bonds, debentures, and other debt securities are famous underlying assets in this trading. 

Examples of futures

Examples of futures
Examples of futures

Looking at future examples can help traders know more about their trading. 

Suppose a trader wishes to earn more by speculating on the price of crude oil. For instance, he expects the crude oil price to be steep. Let us assume that it goes up to $100 per barrel. If the current price of crude oil per barrel is $85, the trader will try to enter into a futures contract. When the price rises and the futures contract reaches its expiry, the trader will benefit immensely. 

It is a kind of example that you witness regularly. Even governments of several nations enter into such contracts to speculate and earn money. 

This derivative product is one of the best for earning money with speculation. However, to earn money, a trader needs to dive into the depth of the market and find the relevant information that might affect its price. Only then can he benefit from a futures contract. 

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