Understanding Futures
Futures, also referred to as futures contracts, are legally binding agreements that enable the trading of a specific asset or commodity at a predetermined date and price in the future.
Considered as derivative financial instruments, futures derive their value from another underlying asset. They serve as a means for investors to track the price movements of various assets such as natural gas, the U.S. dollar, bonds, Bitcoin (BTC), wheat, and more.
The expiration dates associated with futures contracts significantly impact their outcomes.
Leverage in Futures Trading
It’s worth noting that futures trading platforms offer leverage functionality.
This means that traders are only required to have a percentage of the total contract value as margin, while the remaining amount is borrowed or leveraged from the platform.
The initial amount needed is known as the margin.
A trader’s creditworthiness and the trading platform’s leverage conditions determine the margin requirements.
Futures Contract Settlement
At maturity, a futures contract can be settled physically or cash-settled. In physically-settled futures, the underlying asset is exchanged upon expiration.
On the other hand, cash-settled futures contracts involve the settlement of the underlying asset by converting it to cash at maturity.
A common term associated with futures is the “tick.” This refers to the slightest price movement of a futures contract within a 24-hour period.
It’s important to note that a tick can indicate both price increases and decreases.