Introduction 2 Futures Trading - E-book - ePub

Futures contracts are used for a variety of purposes, including hedging against price fluctuations, speculating on the direction of prices, and arbitrage (taking advantage of price differences in different markets). They are used in a wide range of markets, including commodities (e.g. oil, wheat), currencies, and financial instruments (e.g. interest rates, stock indices). In a futures contract, one party (the "buyer") agrees to purchase the underlying asset at a future date, and the other party (the "seller") agrees to deliver the asset at that time.
The buyer pays a small portion of the total purchase price upfront (called the "initial margin") and agrees to pay the remainder (the "settlement price") on the delivery date. The initial margin is typically a fraction of the settlement price and is used to cover the buyer's potential losses if the market moves against them.