What are futures contract (futures)?

A contract that obligates the buyer to buy a specific asset (currencies, goods, metals etc.….) at a future date called (settlement date) and at a predetermined price. The futures contracts specify in detail the quality and quantity of the underlying assets that were contracted, such as basic commodities or financial instruments. The contracts are used to protect from fluctuations in asset prices or to speculate and gain from these fluctuations.

As futures contracts are calculated on a daily basis, investors can get out of their commitment and buy or sell the asset before the delivery date by closing the position just as it is in Forex markets.

The prices of futures contracts are determined only when the contract is signed, and the asset is exchanged on the delivery date which is usually in the distant future. However, most of the participants in the futures markets are speculators who close their positions before the settlement date, so the contracts do not tend to last until the delivery date.

Futures were first traded in basic goods markets in the Nineteenth Century (1975) in Chicago Stock market.

The difference between current (spot) rate and future rate

The spot exchange rate is the price paid to sell one currency for another. If the investor or hedger conducts a trade with the currency spot rate, the exchange of the currency pair may take place at the point where the trade took place, but the futures rate is the currency exchange price plus the risk rate and the interest price rate in the markets which is traded with.

If the spot price of the currency pair rises, the future prices of the currency pair have a high probability to increase. On the other hand, if the spot price of the currency pair falls, future prices have a high probability to fall.

To facilitate trading operations, the international financial organizations yearly determine the futures contracts prices to be calculated on a monthly basis which means that you can buy and sell within a specific future price. This will save countries and institutions the hedging from the strong price volatility in addition to the volume spent to buy a specific asset.

Futures