What are futures contracts?

A future contract, commonly referred to as a “future”, is a financial mechanism that belongs to the group of derivative contracts. In this type of contract, two parties agree to a price determined in the present for a future date by exchanging an asset that may be materials, real estate, physical assets or financial assets.

This type of contract is carried out mainly in the commodity and currency markets, as it represents an insurance for both parties regarding the volatility price is concerned. Both parties conclude the contract with the knowledge that the price variation in the future may entail gains or losses for one of them.

Difference between futures and forward contracts

The origin of the future contract comes from the contracts called forward. This last type of contract also agrees on a price to insure the two parties in the future, but has differences with the futures contract.

The main difference is that the negotiation of a future contract is established by standard terms while a contract forward it is negotiated freely. Another difference is that futures contracts can only operate in organized markets with physical headquarters while forward they operate in any type of market.

Types of futures contracts

There are several types of futures contracts:

  • Futures on physical assets: they are contracts on agricultural and livestock products, metals, energy and over-the-counter indices (weather, real estate, freight, Etc.).
  • Futures on financial instruments: are those futures on currencies, on interest rates and on stocks and stock indices.

Trading futures allows you to cover risks in price fluctuations and has low initial costs, but they can cause profit losses if the market price in the future is advantageous for the other party or you have a type of merchandise that cannot be secured with a contract Of future.

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