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All You Need to Know About Futures Contract


As an agreement to buy or sell futures is in itself a contract, the terms "futures" and "futures contract" may be used interchangeably. From the definition of "futures," we understand that futures contracts are contingent on the establishment of a value for an underlying asset and the assent on the part of the contract buyer-holder to buy or sell that asset at a certain point.

However, there is more to a futures contract than just the identity of the asset named and its face worth, also known as the strike price. In line with their reputations as low-risk enterprises, futures contracts contain other provisions that are meant to ensure the delivery of the commodities within a certain timeframe, or at least the delivery on the promise of purchase or sale that binds the holder.

As is to be expected, a futures contract cannot run on an interminable length, for there must be something to compel the holder to fulfill his or her part of the bargain in the event the underlying asset loses value. This is where what is known as the delivery month comes into play. In the very formation of futures contracts, a date by which the exchange is to be conducted is set, along with the price as mediated by the futures market.

In terms of how much time that usually affords the buyer, this can vary based on the commodity or other asset that receives the ascribed value. In any event, this termination month of the futures contract will be indicated by the coding system invented for classifying such an accord, with a different letter standing for each of the twelve months.

As for preemptive safeguards for the parties who enter into these accords, futures contracts contain a very important provision known as a margin. A margin is essentially a premium placed on a number of financial instruments for sellers that serves to limit the amount of risk to the buyer for being offered a faulty deal, and one that is not only determined by risk but by the rate of exchange.

Futures contracts are in many ways like straight forward contracts, as there is a contract at work in both and the same basic tenet of establishing a price and date for an eventual transaction involving a particular possession. However, a forward contract will not be held to the same conditions of standardization as a futures contract will, especially those that would be set as part of an exchange rate. This is because it is not exchanged, but traded over-the-counter.

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