What are Futures? | Summary and Q&A

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October 18, 2019
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The Plain Bagel
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What are Futures?

TL;DR

Futures are derivative agreements that involve the buying and selling of assets at a predetermined price in the future, providing exposure to various commodities and financial assets.

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Questions & Answers

Q: What are futures and how do they work?

Futures are derivative agreements that involve the buying and selling of assets at a predetermined price in the future. Buyers agree to buy the asset, while sellers agree to sell it. These contracts are obligated to be carried out at the delivery date, regardless of profitability.

Q: How do futures provide exposure to commodities and financial assets?

Futures allow investors to gain exposure to commodities like gold, oil, and orange juice, as well as financial assets like stocks, Treasury bonds, indices, and even Bitcoin. By taking long or short positions in futures contracts, investors can profit from price appreciation or depreciation of the underlying assets.

Q: Can futures contracts be settled without physical delivery of the asset?

Yes, futures contracts can be settled in cash, meaning the asset doesn't actually change hands. Cash is debited and credited to the appropriate accounts. This eliminates the need to manage physical delivery or storage of the asset.

Q: What are the risks associated with futures contracts?

Futures contracts involve the use of leverage, amplifying gains or losses. If the price of the asset moves unfavorably, investors can face substantial losses. It's important for investors to have sufficient knowledge and experience before engaging in futures trading.

Summary & Key Takeaways

  • Futures are derivative agreements that involve the sale of an asset at a predetermined price, allowing investors to manage costs and gain exposure to various commodities and financial assets.

  • These contracts originated as a way for companies to hedge their costs, but they are now widely used by speculators looking to profit from price movements.

  • Futures can be settled in cash, eliminating the need for physical delivery of the asset, and can be netted out before expiration by taking opposite positions.

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