What is a financial future?
In finance, a futures contract, commonly referred to as futures, reflects the obligation of a buyer to purchase an asset or the seller to sell it, at a predetermined price and date. There are financially traded futures on the price of just about anything in financial markets, such as currencies, commodities, stocks, stockmarket indices and much more.
How does a futures contract work?
These contracts are negotiated at marketplaces known as futures exchanges, and their original use was to avoid or diminish the risk of price volatility or exchange rate movements. Say that you buy enough 2020 GBP/EUR futures to cover the value of moving over your retirement savings in 2020. This is an agreement to buy euros with pounds in 2020 at a specified price – 1.31 euro per pound at the time of writing. This would lock in the price of your transfer from pounds to euros.
In 2020, no matter what happens to the exchange rate, you will know how many euros your retirement fund’s pounds will get you. If the pound falls, the futures will be profitable enough to offset the loss on the pounds you hold. If the pound rises, you’ll make a loss on the futures contract to cancel out the gains.
What is a futures contract with example?
It’s also worth noting that the futures price is a type of prediction for what the exchange rate will be in 2020. This can help you in making investment decisions. For example, the pound is expected to strengthen from 1.14 (at the time of writing) to 1.31 euro by 2020 according to people using futures to bet on this.
Futures are among the most popular derivatives for speculation, as the right prediction could potentially yield high gains. But also the short-selling of futures is very attractive, as some may sell their assets during a price decline and then buy it later at a lower fare.
Futures vs Options
The main difference between futures and options is that options give the holder the right to buy or sell the underlying asset at expiration, whereas in a futures contract the holder is obligated to fulfil the terms of the contract.
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Category: Financial Glossary