What Are Futures?

If translated into Indonesian, it could mean 'the future', right? But what is the real meaning of Futures? Check out the answer here!

What are Futures?

Futures are a financial contract that derives value from a fundamental asset. These contracts allow traders to speculate on future price movements of assets such as commodities, money, or financial instruments.

By entering into a Futures contract, the parties agree to buy or sell an asset at a predetermined price on a certain date on the Futures.

Main Components of a Futures Contract

1. Underlying Assets:

   • The asset on which the Futures contract is based. It can be anything, from commodities such as gold or oil to financial instruments such as stock indices.

2. Contract Expiration Date:

   • The predetermined date on which a Futures contract expires. It indicates when the parties must fulfill their obligations to buy or sell the underlying asset.

3. Contract price:

   • The agreed price at which an asset will be bought or sold in the future. This price is set at the time the contract begins.

4. Contract Size:

   • The amount of basic assets specified in the contract. This helps determine the total value of the contract.

Check Price:

How Futures Trading Works

Futures trading involves two main parties: buyers (long positions) and sellers (short positions). Let's break down the process:

1. Opening Position:

   • A trader decides whether to take a long or short position based on their market expectations. A long position means anticipating a price increase, while a short position anticipates a decrease.

2. Market Dynamics:

   • Prices in the Futures market are influenced by supply and demand, geopolitical events, economic indicators, and other factors that affect the underlying asset.

3. Margin and Leverage:

   • Traders are required to deposit margin, a percentage of the contract value, to open a position. This allows for leverage , where the trader controls a larger position with a smaller amount of capital.

4. Marking to Market:

   • Daily adjustments are made to reflect changes in contract value. Profits or losses are credited or debited to the trader's account accordingly.

Benefits of Futures Trading

Hedging

Businesses use futures contracts to mitigate the risk of price fluctuations in critical commodities, ensuring future costs are more predictable.

Speculation

Traders can profit from market rises and falls by correctly predicting future price movements.

Liquidity

The futures market is often very liquid, making it easy to buy and sell positions.

Diversification

Investors can diversify their portfolios by including futures contracts, potentially improving risk management.

Risks Associated with Futures Trading

1. Leverage Risk:

   • While leverage can magnify profits, it also increases the potential for significant losses.

2. Market Risk:

   • Volatility in the price of the underlying asset can cause rapid and unpredictable changes in the value of the futures contract.

3. Counterparty Risk:

   • There is a risk that the counterparty will fail to fulfill its obligations, although this risk is mitigated through the clearing house.

In conclusion, Futures trading is a powerful financial tool, which if understood and used wisely, can provide many benefits. However, it is important for participants to be aware of the associated risks and implement risk management strategies. 

As with any financial instrument, gaining a solid understanding of the future is key to making informed and successful investment decisions.

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DISCLAIMER: This article is informative and does not constitute an offer or solicitation to sell or buy any crypto asset. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in crypto asset exchange rate fluctuations.