What are futures?

Futures contract

Futures contracts derive from the mid 19th century, when centralized markets for agricultural products started to emerge. Then the so-called forwards contracts for goods delivery at a future date, are the ancestors of today’s futures.

Modern futures market includes not only agricultural goods, but also raw materials, currencies, indices, securities and many others.

Futures contract is a derivative instrument, presenting an agreement between two parties to buy or sell an asset at a predetermined price with delivery at a future date.

When you buy or sell a contract, particular amount is being blocked on the account of the investor. This deposit is known as initial margin, and if the price changes unfavorably, it will be necessary to deposit additional funds to cover the contract. In most cases the margin has an amount 5-10% of the total sum of the contract.

When an investor buys futures contract, he expects that the price of the underlying asset will rise in the future, which will allow him to make a profit.

Let’s say for example that we buy a contract for crude oil for, with delivery in June for 1000 barrels in cost $ 60 each or in total amount of 60 thousand dollars. For a requirement of 5% margin, the initial deposit is in amount of 3 thousand dollars.

After a month the oil price reaches 63 dollars, then we decide take the profit and to sell the contracts. For sale we receive 63 thousand dollars, which means that we have realized a profit of three thousand dollars.

To be continued…

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