A financial futures contract is a type of derivative that allows traders to speculate on the future price of a financial asset. In simpler terms, it is a legal agreement between two parties to buy or sell an underlying asset at a predetermined price on a specific future date.
Futures contracts are traded on exchanges, and they are standardized in terms of delivery date and quantity. The most common underlying assets for futures contracts are commodities such as gold, oil, and wheat. However, financial futures contracts are also popular and allow traders to speculate on the future value of financial instruments such as currencies, bonds, and stock indexes.
One major benefit of financial futures contracts is that they provide traders with a way to hedge their risk. For example, a company that relies on exports could use a futures contract to lock in a price for its goods in a foreign currency. This would reduce the risk of fluctuations in exchange rates and protect the company from potential losses.
Futures contracts are also commonly used for speculation. Traders can make a profit by correctly predicting the future price of an asset and buying or selling futures contracts accordingly. However, futures trading can also be risky, as prices can fluctuate rapidly, and traders can suffer significant losses if they make the wrong predictions.
To trade futures contracts, a trader needs to use a Futures Commission Merchant (FCM). The FCM is a registered member of the exchange where the futures contract is traded. The trader can place an order with the FCM, either online or via phone, and the FCM will execute the order on the trader`s behalf.
In summary, a financial futures contract is a type of derivative that allows traders to speculate on the future price of a financial asset. They offer benefits such as risk management and speculation opportunities but also carry significant risks. Interested traders should consult with a licensed financial advisor before engaging in futures trading.