Define Futures In Simple Terms
Futures are contracts made between two parties obligating them to transact an asset at a given price at some predetermined future date.
These contracts have expirations, conditions, and prices that are known up front and are not subject to change.
The price that is agreed upon while establishing the future is the price that must be paid for the underlying asset, regardless of changes in the market by the expiration.
What are Futures In Finance?
Futures can be used by investors to speculate about the direction of the market and to hedge against losses.
If an investor believes the price of a commodity will rise, then they may want to purchase futures contracts now and make a profit at their expiration.
If they believe the price will fall, they may use futures to lock in the sale price for commodities they own to avoid incurring a loss when the price drops.
Futures can involve the transaction of a wide variety of assets, including:
- Physical commodities, like crude oil, corn, wheat, and so on
- Stock index futures, such as the S&P 500 index
- Currency futures, such as for the dollar (UDS), euro (EUR), or pound (GBP)
- Precious metals futures, such as for silver, gold, and platinum
- US Treasury futures, such as for bonds or other financial products