Futures are a type of financial instrument that allow buyers and sellers to agree to buy or sell an asset, such as commodities or currencies, at a specific price and date in the future. Futures contracts are standardized agreements traded on exchanges, and they are used to hedge against price fluctuations and to speculate on price movements.
Here are some key features of futures:
- Standardized contracts: Futures contracts are standardized agreements that specify the quantity, quality, and delivery date of the underlying asset. For example, a gold futures contract might specify that the buyer will purchase 100 ounces of gold at a specified price and delivery date.
- Margin requirements: Futures traders are required to put up a margin, or a deposit, to cover potential losses. This margin is a percentage of the total value of the contract and is typically much smaller than the value of the underlying asset.
- Leverage: Because futures traders only need to put up a small percentage of the total value of the contract, futures trading is highly leveraged. This means that traders can control a large amount of the underlying asset with a relatively small investment.
- Settlement: Futures contracts can be settled in two ways: physical delivery or cash settlement. Physical delivery means that the buyer takes possession of the underlying asset, while cash settlement means that the buyer receives or pays the difference between the contract price and the current market price.
- Market liquidity: Futures contracts are traded on exchanges, which provide a centralized marketplace for buyers and sellers. This means that futures contracts are highly liquid, and traders can easily buy and sell contracts at any time.
Overall, futures are a popular tool for hedging and speculation in a variety of markets, including commodities, currencies, and financial instruments. However, futures trading can be complex and risky, so it’s important to understand the risks involved before investing.
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