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What is a futures contract?

Futures contracts are financial derivatives that oblige the buyer to purchase some underlying asset (or the seller to sell that asset) at a predetermined future price and date. A futures contract allows an investor to speculate on the direction of a security, commodity, or financial instrument, either long or short, using leverage.

What is a futures price F0(T)?

compare the value and price of forward and futures contracts Futures are standardized, exchange-traded derivatives (ETDs) with zero initial value and a futures price f0(T) established at inception. The futures price, f0(T), equals the spot price compounded at the risk-free rate as in the case of a forward contract.

Why do oil producers use futures contracts?

They use futures contracts to ensure that they have a buyer and a satisfactory price, hedging against any changes in the market. An oil producer needs to sell its oil. They may use futures contracts to lock in a price they will sell at, and then deliver the oil to the buyer when the futures contract expires.

What is the difference between a futures contract and a standardized contract?

Futures contracts, on the other hand, are standardized contracts that trade on stock exchanges. As such, they are settled on a daily basis. These arrangements come with fixed maturity dates and uniform terms. There is very little risk with futures, as they guarantee payment on the agreed-upon date.

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