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Futures Contract

A futures contract is a standardised derivative obliging the holder to buy or sell an asset on a set future date at a price fixed today. Futures trade on organised markets such as VIOP with standard sizes and expiries; the clearing house acts as counterparty to both sides and absorbs credit risk.
Contents
  1. 1.Key points
  2. 2.How it works
  3. 3.Interpretation
  4. 4.Pitfalls
  5. 5.Frequently asked questions

Key Points

  • The underlying can be an index, stock, currency, gold or commodity.
  • A long position gains from rising prices, a short position from falling prices.
  • because of leverage a small price move can wipe out the margin.

How It Works

Theoretical futures price = Spot × (1 + Interest − Dividend yield)^(days/365). A futures price above spot is called contango, below spot backwardation. Profit/Loss = (Closing price − Opening price) × Contract size × Number of contracts.

Interpretation

A long position gains from rising prices, a short position from falling prices. To hedge, index futures equal to the stock portfolio are sold; exporters lock in FX risk by selling currency futures.

Pitfalls

because of leverage a small price move can wipe out the margin. Positions close at expiry; holding long term requires rolling contracts, which costs money. Daily settlement requires cash flow.

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Frequently Asked Questions

A futures contract is a standardised derivative obliging the holder to buy or sell an asset on a set future date at a price fixed today.

Theoretical futures price = Spot × (1 + Interest − Dividend yield)^(days/365). A futures price above spot is called contango, below spot backwardation. Profit/Loss = (Closing price − Opening price) × Contract size × Number of contracts.

Prepared by: Yatırımcı.AI Research TeamLast reviewed: Method: MethodologyEditorial policy