Futures contract - Simple English Wikipedia, the free encyclopedia

A futures contract is an agreement between two parties.^[1] The buyer pays the seller today for the promise of the commodity at a future date.^[2] Futures contracts are traded in futures exchanges.^[3] The commodities can be things such as livestock, agriculture produce, metals, energy, and financial products.^[4] Trading futures can be profitable.^[4] But it is also complex and very risky.^[5] Instead of gaining a profit, an investor can lose the money invested.^[4] They could be required to pay more than they invested.^[5]

Margin[change | change source]

Margin is the amount of money investors must give to the exchange, in order for contracts to be ensured against counterparty risk.^[2] Initial margin ranges around 10% of the total value of the contract.^[6] Margin rates can be lowered for hedgers since the contracts are covered by assets.

Examples[change | change source]

• Buffett is a farmer. He expects to harvest a hundredweight of corn. He wants a guaranteed price after the harvest is finished. Buffett would short a futures contract. He is obligated to deliver the corn at expiration.
• Graham works for ABC Airlines. The company's performance is very sensitive to fuel prices, so ABC Airlines needs guaranteed fuel prices. Graham would buy a futures contract, and the airline would receive fuel at expiration, at the price set.
• Hwang is a speculator. He believes that Treasury bond prices will go down. He shorts 10-year bond futures, and cancels his contract before expiration. If Hwang had incurred a large loss, his broker, or investment bank may have issued a margin call.

References[change | change source]

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