A futures contract is a contract to purchase a specific underlying instrument at a specific time in the future, for a specific price. All futures are exchange-traded contracts and they're standardized in terms of delivery date, amount and contract terms. Traders use futures contracts to speculate on the direction of an underlying instrument (including indices). Banks and other financial institutions use them to hedge their portfolios against adverse fluctuations in the price of an underlying exposure. Such hedging is possible because you can short futures contracts - i.e. sell the futures contract.
There are two basic categories of futures participants: hedgers and speculators.
In general, hedgers use futures for protection against adverse future price movements in the underlying cash commodity. The rationale of hedging is based upon the demonstrated tendency of cash prices and futures values to move in tandem.
There are two basic categories of futures participants: hedgers and speculators.
In general, hedgers use futures for protection against adverse future price movements in the underlying cash commodity. The rationale of hedging is based upon the demonstrated tendency of cash prices and futures values to move in tandem.
Copyright ©2009 What-is.Net All rights reserved.
Last Updated: Sep 2009
Last Updated: Sep 2009
What are Futures?
Hedgers are very often businesses, or individuals, who at one point or another deal in the underlying cash commodity. Take, for instance, a major food processor who cans corn. If corn prices go up. he must pay the farmer or corn dealer more. For protection against higher corn prices, the processor can "hedge" his risk exposure by buying enough corn futures contracts to cover the amount of corn he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if corn prices rise enough to offset cash corn losses.
Speculators are the second major group of futures players. These participants include independent floor traders and investors. Independent floor traders, also called "locals", trade for their own accounts. Floor brokers handle trades for their personal clients or brokerage firms.
Speculators are the second major group of futures players. These participants include independent floor traders and investors. Independent floor traders, also called "locals", trade for their own accounts. Floor brokers handle trades for their personal clients or brokerage firms.
