Investing is no easy task these days. With such a myriad of products available, one really has to be on his/her toes to ensure that they don’t get burnt with all that’s going on. It would be handy to know what futures really entail as an investment product. With Bitcoin futures soon to be launched, there is much anticipation on this investment product
Products known as Cantor Futures are also interesting as they tend to protect the investor from external shocks especially when it comes to trading on the crypto currency exchanges which tend to vary and wobble slightly especially when panic mode selling comes into the equation. By using cantor futures, one can easily get into the market and not burn their fingers by excessive exposure to risk. Futures commission is also not so prohibitive and the rates are quite competitive.
What are 'Futures'
Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset, such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash.
Breaking down 'Futures'
The futures markets are characterized by the ability to use very high leverage relative to stock markets. Futures can be used to hedge or speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk, or anybody could speculate on the price movement of corn by going long or short using futures.
The primary difference between options and futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his contract. In real life, the actual delivery rate of the underlying goods specified in futures contracts is very low as the hedging or speculating benefits of the contracts can be had largely without actually holding the contract until expiry and delivering the good. For example, if you were long in a futures contract, you could go short in the same type of contract to offset your position. This serves to exit your position, much like selling a stock in the equity markets closes a trade.
Futures Speculation
Futures contracts are used to manage potential movements in the prices of the underlying assets. If market participants anticipate an increase in the price of an underlying asset in the future, they could potentially gain by purchasing the asset in a futures contract and selling it later at a higher price on the spot market or profiting from the favorable price difference through cash settlement. However, they could also lose if an asset's price is eventually lower than the purchase price specified in the futures contract. Conversely, if the price of an underlying asset is expected to fall, some may sell the asset in a futures contract and buy it back later at a lower price on the spot.
Futures Hedging
The purpose of hedging is not to gain from favorable price movements but prevent losses from potentially unfavorable price changes and in the process, maintain a predetermined financial result as permitted under the current market price. To hedge, someone is in the business of actually using or producing the underlying asset in a futures contract. When there is a gain from the futures contract, there is always a loss from the spot market, or vice versa. With such a gain and loss offsetting each other, the hedging effectively locks in the acceptable, current market price.
Futures contract
A futures contract is a legal agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future. Futures contracts are standardized to facilitate trading on a futures exchange and, depending on the underlying asset being traded, detail the quality and quantity of the commodity.
Example of Futures Contracts
Futures contracts are used by two categories of market participants: hedgers and speculators. Producers or purchasers of an underlying asset hedge or guarantee the price at which the commodity is sold or purchased, while portfolio managers or traders may also make a bet on the price movements of an underlying asset using futures.
