Futures

Futures and options (F&O) are derivative products in the stock market. Since they derive their values from an underlying asset, like shares or commodities, they are called derivatives. Two parties enter a derivative contract where they agree to buy or sell the underlying asset at an agreed price on a fixed date.

A futures contract is a legal agreement to buy or sell a commodity or financial instrument at a set price and time in the future. Futures contracts are a type of derivative contract, and are often used as a hedge investment. 
Here are some key features of futures contracts:
  • Standardized
    Futures contracts have a standardized size, which can vary by product. For example, one contract for crude oil may represent 1,000 barrels, while one contract for gold futures may represent 100 troy ounces. 
  • Traded on an exchange
    Futures contracts are traded on a futures exchange, which can be physical or electronic. 
  • Used as a hedge
    Futures contracts can be used to protect against price fluctuations. For example, a farmer might use a futures contract to lock in a price for their crop before it's delivered. 
  • Risks
    Futures contracts can be risky, and may involve margin call risk, expiration risk, interest rate risk, and more. 
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