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Future contract

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Future contract

A futures contract is a standardized legal agreement to buy and sell a specific security or asset at a predetermined price on a particular date in the future. They are used by investors or companies that wish to physically deliver a commodity or supply it in the future. They are included in an investment portfolio to secure a specific price of an asset or security while protecting the investment against the risk of wild price swings in the future. Investors use futures contracts to manage their exposure to the risk of the price changes while other wagers on the price movement to earn a profit on price margin.

The future contract goes through the exchange clearinghouse or exchange act that acts as a facilitator in the market. For future contracts to be valid, they must be of the same security, asset or commodity, same quality, and quantity. They must also be of the same delivery location and date or month. The contract must also specify the unit of measurement, the currency in which the contract is quoted, the currency unit in which the contract is denominated, and how the trade will be settled..

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Investors in the future contract are not required to pay the full value of the contract while entering into a trade but instead required to pay an initial margin amount. The margin is the percentage of the total contract value that varies on the size of the contract. The various type of future contracts available in the market includes the United States treasury future bonds, currency future such as euro and British bond, commodity future such as natural gas, precious metal future for gold and silver, and stock index future. Example of the future contract include U.S. Treasury note volatility index priced $1000 per contract, S&P 500 variance future priced at @ 68, and high yield corporate bond index future priced at $ 2,074

 

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