Futures

Futures are financial agreement that oblige the holder to buy or sell a given quantity of an asset or commodity for a specific price and on a pre-determined date. Futures can be either settled via delivery of the asset or commodity or they might be cash-settled where a sum of money equivalent to the value is paid instead.

Futures are standardised contracts (i.e. the terms do not vary). This makes it possible for them to be traded on an exchange. Futures markets may be used by producers to sell their commodities or by users (buyers) of those commodities to enable them to hedge against potential future price increases.

Futures contracts are leveraged because the buyer is not required to put up the full cost of purchasing an asset or commodity until delivery date.

Futures contracts may also be traded by speculators who buy and then sell contracts in expectation of a change in the price of the underlying asset or commodity. The leverage inherent in futures contracts allow speculators to potentially make significant gains, however, these can also become equally large losses if their expectations about the direction of the price are subsequently proved to be incorrect.

A large range of underlying commodities and assets are traded on Futures exchanges, these include all major commodities such as metals, energy (oil, gas etc), agricultural goods like wheat, soya or corn and also financial assets like major currency pairs, government bonds or stock indices.