Futures

Futures contracts allow buyers and sellers to agree upon a price for an asset to be exchanged at a later date. A buyer in a futures contract goes ‘long’ hoping that the asset will rise in value. The seller goes ‘short’ hoping that the asset will fall in value. Although Futures are similar to Forwards, they experience several key differences. Firstly, Futures are traded over an exchange which means that they have to be standardised and are thus more rigid than Forwards. Secondly, Futures are marked to market daily, which means that the differences in value from the time of the contract are settled on a daily basis between the buyer and the seller, unlike Forwards that are settled at the very end of the contract. Finally, Futures are often used by speculators who have no intention of taking physical possession of the asset being traded; this means that futures contracts are normally closed before they reach maturity. On the contrary, Forwards are used by sellers such as farmers who want to hedge against price instability and so the commodity being traded is most often exchanged at the contract’s maturity.