Tuesday, October 21, 2008

Futures: A Beginning

I have been meaning to talk about Futures Contracts for quite some time. I'm not going to go into any depth right this moment, so let this post act as an entry point and introduction to Futures derivatives.
Forward Contracts are a legal agreement between parties calling for the future delivery of an asset at a pre-arranged negotiated price. Futures Contracts are a standardized form of forward contracts that are able to be traded in a market. By having a standard contact, futures can be easily liquidated without the need for personal negotiation.

Futures contracts are made between two traders. One trader with a long position is contracted to to pay an agreed price at a specific time, while the other trader with a short position commits to delivering the asset. This contract is often used to hedge against risk of price fluctuation or for speculation. The contracts are typically made on goods in five categories: agricultural commodities, metals and minerals, energy, foreign currencies, and financial futures.

There is a wealth of knowledge about futures out there that I encourage you to research for yourself. I will try to return to the topic of Futures again in the future.

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