How long are futures contracts

Underlying assets include physical commodities or other financial instruments. Futures contracts detail the quantity of the underlying asset and are standardized to facilitate trading on a futures exchange.

Futures can be used for hedging or trade speculation. For example, you might hear somebody say they bought oil futures, which means the same thing as an oil futures contract. Futures contracts are also one of the most direct ways to invest in oil. The term "futures" is more general, and is often used to refer to the whole market, such as, "They're a futures trader.

Futures contracts are standardized, unlike forward contracts. Forwards are similar types of agreements that lock in a future price in the present, but forwards are traded over-the-counter OTC and have customizable terms that are arrived at between the counterparties. Futures contracts, on the other hand, will each have the same terms regardless of who is the counterparty. Futures contracts are used by two categories of market participants: hedgers and speculators.

Producers or purchasers of an underlying asset hedge or guarantee the price at which the commodity is sold or purchased, while portfolio managers and traders may also make a bet on the price movements of an underlying asset using futures.

An oil producer needs to sell its oil. They may use futures contracts to do it. This way they can lock in a price they will sell at, and then deliver the oil to the buyer when the futures contract expires. Similarly, a manufacturing company may need oil for making widgets.

Since they like to plan ahead and always have oil coming in each month, they too may use futures contracts.

This way they know in advance the price they will pay for oil the futures contract price and they know they will be taking delivery of the oil once the contract expires. Futures are available on many different types of assets. There are futures contracts on stock exchange indexes , commodities, and currencies. Imagine an oil producer plans to produce one million barrels of oil over the next year.

It will be ready for delivery in 12 months. The producer could produce the oil, and then sell it at the current market prices one year from today. Given the volatility of oil prices, the market price at that time could be very different than the current price. If the oil producer thinks oil will be higher in one year, they may opt not to lock in a price now.

A mathematical model is used to price futures, which takes into account the current spot price , the risk-free rate of return , time to maturity, storage costs, dividends, dividend yields, and convenience yields. Contracts are standardized. The CFTC is a federal agency created by Congress in to ensure the integrity of futures market pricing, including preventing abusive trading practices, fraud, and regulating brokerage firms engaged in futures trading.

Retail traders and portfolio managers are not interested in delivering or receiving the underlying asset. A retail trader has little need to receive 1, barrels of oil, but they may be interested in capturing a profit on the price moves of oil. Futures contracts can be traded purely for profit, as long as the trade is closed before expiration. Many futures contracts expire on the third Friday of the month, but contracts do vary so check the contract specifications of any and all contracts before trading them.

This gives them control of 1, barrels of oil. Rather, the broker only requires an initial margin payment, typically of a few thousand dollars for each contract.

The profit or loss of the position fluctuates in the account as the price of the futures contract moves.

If the loss gets too big, the broker will ask the trader to deposit more money to cover the loss. This is called maintenance margin. The final profit or loss of the trade is realized when the trade is closed. A futures contract gets its name from the fact that the buyer and seller of the contract are agreeing to a price today for some asset or security that is to be delivered in the future.

These two types of derivatives contract function in much the same way, but the main difference is that futures are exchange-traded and have standardized contract specifications. These exchanges are highly regulated and provide transparent contract and pricing data.

Forwards, in contrast, trade over the counter OTC with terms and contract specifications customized by the two parties involved. No worries for refund as the money remains in investor's account. Circular No. Kotak securities Ltd. We have taken reasonable measures to protect security and confidentiality of the Customer information. The Stock Exchange, Mumbai is not answerable, responsible or liable for any information on this Website or for any services rendered by our employees, our servants, and us.

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Account Login Not Logged In. What are Futures Contracts? What are stock futures: Stock futures are derivative contracts that give you the power to buy or sell a set of stocks at a fixed price by a certain date.

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Futures investing basics. Educational videos. Investing Basics: Futures Gain a better understanding of futures and contract specifications like tick size, contract size, delivery, and margin requirements.