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Be Aware of the Background Behind Futures

Background Futures

Futures, like derivatives as a whole, are contracts delineating terms of service of an exchange of goods for money or some other service, for which the price is set in the initial arrangement and is based off of a projected value of the underlying asset (also known simply as an underlying) specified in said arrangement. As noted, these instruments are strongly reminiscent of options.

Futures are particularly versatile derivative securities for they may be used on both sides of the risk management spectrum. In terms of hedging, or reducing, risk, they are particularly prudent measures for producers of commodities frequently used as the source of underlying assets, as they can be used to establish the price of the product in which they specialize against potential declines in their market value.

However, in the futures market, they may be of value to the general investor and not as a mitigation of risk, but as a means of raising capital through speculation. Thus, futures market investments may make sense for the portfolio bearer in the interest of diversification.

For futures to be of genuine merit to most buyers, they will almost certainly have to precede an upswing in the value of the underlying asset in the financial markets. As noted, a future expressly states that the holder must buy or sell it upon reaching a certain date. However, if the asset to which it pertains has not gone up in worth, its use will be severely compromised.

Usually, in the futures market the goal will be to purchase a contract at a lower rate then for what one sells it. If the value plummets, a sale would mean a net loss and a purchase would probably do little for the investor unless he or she has a vested interest in the asset at hand.

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