What is Meant by Futures in Trading?

Introduction

The futures market is the largest and most important financial market in the world, with a daily trading volume of $5 trillion. Futures is a system that allows counterparties to exchange a commodity between themselves at a future date and price that is set in advance. 

Futures contracts are standardised for quality and quantity and traded on a futures exchange. They are used as a hedge against price movements, as a means of speculation, and to obtain risk management. In other words, futures trading is a way of betting on the future price of a commodity or security. 

This blog will explore what futures are and how major commodities traders use futures contracts.

What Are the Different Types of Futures in Trading?

Stock Futures

Stock futures are a financial product that allows a trader to bet on the future value of a stock without owning the stock. If the stock increases in value, the futures investor profits. Suppose the stock decreases in value, the futures investor loses money. Futures allow you to create a contract that will be paid off at a later date determined by the contract.

Index Futures

When you want to trade a stock that is not listed on an exchange, you can use an index future. One of the main reasons an index future is used is because a supplier specialises in this niche. It is possible to create a future that can be used for a specific company or group of companies. 

These companies can be from many different industries and are not limited to the stock market. They are also used when you have a large amount of capital and want to hedge your risk by making trades in the future.

Currency Futures 

Currency futures are derivative contracts for buying or selling a specific amount of a currency at a specified price at a specified time in the future. The value of a currency future is based on the value of the currency unit. It is represented by the futures price and the value of the currency unit, as represented by the spot price. Currency futures have the same features as standardised futures contracts in general, such as exchangeability, fungibility, and price convergence.

Commodity Futures 

Commodity futures are a type of contract between a buyer and a seller that involves the exchange of a specific quantity of a commodity at a specified price and delivery date in the future. Such contracts are used for hedging and speculation purposes, as well as for forwarding price risk management. They may also be used for arbitrage and transfer risk from one party to another.

Interest Rate Futures

Interest Rate Futures (IRFs) are a type of futures contract traded on exchanges. The IRF contracts are agreements to buy one currency to sell another when a specified event occurs. The most common event used is interest rates. As interest rates rise, the value of paid currencies will rise relative to the value of received currencies.

Conclusion

In finance, futures are a type of financial contract 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. There are many different types of futures. They can be categorised according to the type of asset being traded, when the asset can be delivered, when the asset contract can be traded, and whether the contract is standardised or customised. There are three different types of futures: cash or spot, forward, and futures.