Futures Contract

Trading

Quick Definition

A Futures Contract is a standardized agreement to buy or sell an asset at a predetermined price on a specified future date.

Detailed Explanation

Futures Contracts are traded in the derivatives market and are used for hedging risk or speculation. Both buyer and seller are obligated to fulfill the contract on the expiry date.

In India, futures trading takes place on exchanges like the National Stock Exchange and Bombay Stock Exchange, regulated by the Securities and Exchange Board of India.

Key Features of Futures Contracts

  • Standardized contract terms
  • Traded on exchanges
  • Obligation to buy/sell at expiry
  • Requires margin (initial deposit)

Uses of Futures Contracts

  • Hedging: Protect against price fluctuations
  • Speculation: Profit from price movements
  • Arbitrage: Exploit price differences

Futures vs Options

  • Futures: Obligation to execute
  • Options: Right but not obligation

Risks

  • High volatility
  • Leverage increases both profit and loss
  • Requires market knowledge

Example

"A trader agrees to buy gold at ₹60,000 per 10g after 3 months. If price rises, they profit; if it falls, they incur a loss."

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