What Is A Futures Agreement

But not everyone in the futures market wants to trade a product in the future. These people are investors or speculators who are trying to make money by changing prices in the contract itself. If the price of jet fuel rises, the futures contract itself becomes more valuable and the owner of that contract could sell it for more on the futures market. These types of traders can buy and sell the futures contract without intending to deliver the underlying product; they are only on the market to bet on price movements. Futures allow players to secure a certain price and protect themselves from the possibility of wild price fluctuations (up or down). To illustrate how futures work, think of the fuel jet: the first futures contracts were traded for agricultural commodities and, subsequently, natural resource futures, such as oil, were traded. Financial transactions were introduced in 1972 and, in recent decades, foreign exchange, interest rate and index futures have played an increasingly important role in general futures markets. Even organ futures have been proposed to increase the supply of transplant organs. Futures help companies lock in prices, benefiting both buyers and sellers. For example, a carrier may use futures contracts to block a guaranteed gas price.

This will allow the transportation company to budget more accurately in the future than it could have if it depended on gas prices. Not everyone who participates in the futures market will attempt to trade the underlying at the expiry, so they would stand out in cash. This is often used by speculators and hedgetors who wish to take a position on whether the market price will rise or fall without having to assume ownership of the asset itself. The only thing the hands exchange is the corresponding amount of money. Futures margining eliminates much of this credit risk by requiring holders to update the price of an equivalent futures contract purchased that day on a daily basis.

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