Know Commodities
Definition
of a "Commodity" |
Commodity
Exchanges | Derivatives
| Types
of traders in a derivatives market | Definition
of future contracts
Know Commodities
Definition
of a "Commodity" |
Commodity
Exchanges | Derivatives
| Types
of traders in a derivatives market | Definition
of future contracts
Definition of future contractsFuture contracts is an agreement made and
traded on the exchange between two parties to buy or sell a commodity at
a particular time in the future for a pre-defined price. Since both the
parties are unaware of each other, the exchange provides a mechanism to
give the party assurance of honoured contract. The exchange specifies
standardized features of the contract. The risk to the holder is
unlimited, and because the pay off pattern is symmetrical, the risk to
the seller is unlimted as well. Money lost and gained by each party on a futures contract are equal and opposite. In other words, futures trading is a zero-sum game. These are basically forward contracts, meaning they represent a pledge to make a certain transaction at a future date. The exchange of assets occurs on the date specified in the contract. These are regulated by overseeing agencies, and are guaranteed by clearinghouses. Hedgers often trade futures for the purpose of keeping price risk in check. Future contracts are often used by commercial enterprises as hedging tools to reduce the risk of expected future purchases or sales of the underlying asset. If used to speculate, risk increases. So risk depends on the underlying instrument and the use of the future. Advantages of Futures Contracts
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