Futures contract guide
Your futures contract is a financial contract in which two parties agree to transact a set of financial instruments or physical commodities for future deliver at a particular price. When you buy a futures contract, you are simply agreeing to buy a commodity that has seller has not yet produced at a set price. The future date is called the delivery date or the final settlement date. And the official price of the contract at the end of the day’s trading session on the exchange is called as the settlement price.
Traders who participate in the buying and the selling of futures contract may be placed into two groups. The first group is the hedgers who have an interest in the commodity and are seeking to hedge out the risk of price changes and the second group of players are called speculators. Speculators are those personalities who seek to make profit by predicting the market moves and by buying the commodity on paper for which they have no use. The group of hedgers will include the producers and the consumers of a certain commodity. If an investor holding the futures contract wishes to get out of the deal before the expected settlement date, the investor are limited with few options. The investor can offset the position by selling a long position or the investor can purchase a short position. When an investor sells in a long position, he expects that the asset will rise in value. If he buys on a short position, then his expectation is that the contract will fall in value in the future. By doing any of the two options, the contract holder closes out the futures position and he is now free from contract obligation.
