What is a futures contract?

Futures contracts are financial derivatives that oblige the buyer to purchase some underlying asset (or the seller to sell that asset) at a predetermined future price and date. A futures contract allows an investor to speculate on the direction of a security, commodity, or financial instrument, either long or short, using leverage.

What happens if the price of a futures contract decreases?

The investor would then exercise his right to buy the asset at the lower price obtained through buying the futures contract, and then resell the asset at the higher current market price. Investors profit from the right to sell if the price of the underlying asset decreases.

What is the difference between buyer and seller in a futures contract?

As part of the futures contract, the buyer must purchase the underlying asset at the predetermined price, while the seller must follow through with the sale at the negotiated terms. Buyer: The buyer of the futures contract is said to be taking a “long” position, i.e. profits if the price of the underlying asset increases.

What is the difference between futures and options?

Both contracts enable people to speculate on the future market price of an asset, but while futures always result in the physical or cash-equivalent settlement of the contract, an option can be left to expire worthless. Futures contracts are popular derivatives, used to exchange physical assets, as well as speculate and hedge markets.