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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.

Is a futures contract a derivative?

The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price. The specified time in the future when delivery and payment occur is known as the delivery date. Because it derives its value from the value of the underlying asset, a futures contract is a derivative .

What is futures trading?

Futures trading is the act of buying and selling futures. These are financial contracts in which two parties – one buyer and one seller – agree to exchange an underlying market for a fixed price at a future date.

What happens if the price of a futures contract decreases?

The investor would then exercise his right to buy the asset at the lower price obtained through buying the futures contract, and then resell the asset at the higher current market price. Investors profit from the right to sell if the price of the underlying asset decreases.

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