What Is A Futures Contract

What Is A Futures Contract

If you are having some view on a particular assets price then you can enter into a forwards contract. All that you have to do is to search for another party who holds the completely opposite opinion to you. But afterward contact has many risks and all this has been taken care of by futures contract.

The futures contract has been designed to take care of the shortcomings of the forward’s contract. The transactional method is the same as the forward’s contract but it eliminates the risks that are involved when you enter into a forwards contract.

Futures agreement between two parties

The structure of futures and a forwards contract the same. Likesupposein a forwards contract one party is unable to find another party that has the completely opposite view to him. This means that there can be no agreement because you need two parties that hold contradictory opinions to enter into an agreement. So even if one party wants to enter into an agreement he is finding it difficult to do so because he cannot find the party who is ready to enter into the agreement with him.

Instead of looking for a counterparty, the first part walks into the financial market where there are many counterparties who are ready to take on an opposite view on the market. The first part tells his view and the parties that are willing to take an opposite view will line up for the same.

The working of the futures market is in this way only. This makes it available for all and not just to a few of them. Evenretailtraders can trade on the futures exchange market. They can participate in stock and commodity exchange of the futures market.

Futures and forwards

The structure of the futures contract is slightly different toa forwards contract. This has been done so because of the risks that are involved in the forwards market.

A very important difference is that the futures contract price will mimic the price of the underlying asset. The futures contract is based on the future price of the asset. The price also mimics the price of the asset. This is the underlying asset. What the underlying asset will do the futures will do the same. When the price of the underlying asset goes up so will the price of the futures contract. Also if the price of the underlying goes down then the price of the futures will go down too.