Futures Definition
Futures refer to standardized contracts between two parties stipulating the purchase and sale of an asset at an agreed-upon price and date in the future. Regulated by financial authorities, futures contracts include details like the quantity and quality of the commodity or asset, offering a level of transparency and security for both buyer and seller.
Futures Key Points
- Futures are standard legal agreements to buy or sell an asset at a future date and at a predetermined price.
- Futures contracts are often used for hedging risk or for speculation.
- The value of a futures contract fluctuates with the value of the underlying asset.
- Futures contracts are standardized and are typically traded on an exchange.
What are Futures?
Futures are derivative financial contracts that obligate the buyer to purchase, or the seller to sell, an asset at a predetermined price and date. This asset could be a physical commodity like oil or wheat, a financial instrument such as bonds or shares, or even a digital asset like Bitcoin. The crucial aspect is that the deal involves a binding agreement to conduct a transaction in the future – hence the term ‘futures’.
Why Futures are Used
Futures are primarily used for hedging or speculation. Hedging is a risk management strategy. For instance, a farmer may use a futures contract to lock in a certain price for the crop, protecting against the potential of falling market prices in the future. On the other hand, speculators might buy or sell futures contracts aiming to profit from price changes. They have no intention of owning it.
When and Where are Futures Traded?
Futures contracts are traded on exchanges that act as a marketplace for buyers and sellers. These exchanges, like the Chicago Mercantile Exchange (CME) or the New York Stock Exchange (NYSE), ensure the standardization of contracts and oversee the transaction execution. Futures are traded almost around the clock, with trading hours varying by the type of contract and the exchange.
How Futures Work
A futures contract outlines specific details like the quantity and quality of the asset, the date and location of delivery and the price. Price of futures contracts fluctuates with changes in the underlying asset’s price, providing opportunities for profit (or risk of loss). Importantly, futures can be “settled” in two ways: via physical delivery of the asset or through cash settlement.
Futures and Blockchain/ Cryptocurrency
In the world of blockchain and cryptocurrency, futures are an important tool. They allow investors to bet on the price of a particular cryptocurrency in the future, which means they can potentially profit whether the cryptocurrency increases or decreases in value. Bitcoin futures, Ethereum futures, and other cryptocurrency futures have become increasingly popular in recent years. They provide a way to manage risk, engage in price speculation, and attract more institutional money into the crypto market.
