Understanding Futures
Futures, also known as futures contracts, are legally binding agreements to trade a specific asset or commodity at a predetermined date and price in the future. These contracts also track the price movement of the underlying asset or commodity.
Futures fall under the category of derivative financial instruments as their value is derived from another asset. Investors can utilize futures to monitor the price of various assets such as natural gas, the S&P 500 index, the U.S. dollar, bonds, Bitcoin (BTC), wheat, and more. The expiration dates play a significant role in the outcomes of futures trading.
The expiration month is associated with the dates to provide a clear description. For instance, December Bitcoin futures refer to BTC futures contracts that expire in December.
It is important to note that futures trading platforms offer leverage options. This means that traders only need to invest a percentage of the total contract value, while the remaining amount is borrowed or leveraged from the platform. The initial required amount is known as the margin. The margin is determined based on the trader’s creditworthiness and the conditions set by the trading platform for leveraged trading.
When a futures contract reaches maturity, it can be settled physically or through cash. Physically settled futures involve the exchange of the underlying asset upon expiry.
On the other hand, cash-settled futures contracts describe a situation where the underlying asset is converted into cash upon maturity.
In the futures market, the term “tick” is commonly used. A tick represents the smallest price movement of a futures contract within a 24-hour period. It is important to note that a tick can indicate either an increase or decrease in price.
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