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A futures contract is an agreement between two parties to buy or sell an asset at a predetermined price on a predetermined date in the future. Futures contracts are traded on exchanges, where the exchange acts as the intermediary between buyers and sellers, and they are standardised. They can be used in various financial markets, including commodities, currencies, and stock indices.
Traders may choose to purchase futures contracts for several reasons:
Hedging: Futures contracts allow traders to lock in future prices for the assets they want to trade. Traders who want to hedge against price uncertainties of assets can purchase a futures contract to reduce the risk of losses.
Price discovery: Futures contracts are priced based on the interaction between buyers and sellers in the market. Therefore, traders can use obtain price discovery information on their target assets by monitoring the price of futures contracts on those assets.
Leverage: Futures contracts can be traded on leverage, which allows traders to gain greater exposure to the market than they would be able to with their capital alone.
Liquidity: Futures contracts are traded on exchanges, and they are highly liquid. Traders who want to enter and exit positions quickly can purchase futures knowing they can easily sell them.
A buyer wants to purchase corn can enter into a corn futures contract. As futures contracts are standardised, one full contract of corn futures is equivalent to 5,000 bushels of corn. The buyer purchases one full contract at 663.50¢ per bushel with delivery to occur in three months’ time.
The price of corn increases to 680¢ per bushel in three months, and the buyer sells the futures contract to a third party for a profit of 16.50¢ per bushel. They earn the difference between the contract’s purchase and selling prices, multiplied by the number of bushels in the contract.
(680 – 663.50) x 5,000 = $8,250
The trader thus makes a profit of $8,250.
However, if the price of corn decreases to 650¢ per bushel in three months, the buyer will incur a loss if they choose to sell the contract. In this case, they can choose to hold on to the contract until the price of corn increases again and it becomes more favourable to sell. They can also choose to take delivery of the physical corn.
ADSS offers a range of global markets for traders, with opportunities in indices, commodities, forex, equities and more. We also feature tutorials, how-to guides, and weekly webinars to help you navigate the financial markets and find better trading opportunities. You can start trading and investing online by opening a live trading or demo trading account.
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Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.
ADS Securities LLC – S.P.C (“ADSS”) is authorised and regulated by the Securities and Commodities Authority (“SCA”) in the United Arab Emirates under First Category: Dealing in Securities and Fifth category: Arrangement and advice (Introduction). ADSS is a Limited Liability Company – Sole Proprietorship Company incorporated under United Arab Emirates law. The company is registered with the Department of Economic Development of Abu Dhabi (No. 1190047) and has its principal place of business at 8th Floor, CI Tower, Corniche Road, P.O. Box 93894, Abu Dhabi, United Arab Emirates.
The information presented is not directed at residents of any particular country outside the United Arab Emirates and is not intended for distribution to, or use by, any person in any country where the distribution or use is contrary to local law or regulation.
ADSS is an execution only service provider and does not provide advice. ADSS may publish general market commentary from time to time. Where it does, the material published does not constitute advice, or a solicitation, or a recommendation to a transaction in any financial instrument. ADSS accepts no responsibility for any use of the content presented and any consequences of that use. No representation or warranty is given as to the completeness of this information. Anyone acting on the information provided does so at their own risk.
