Future trading, also known as futures trading, refers to the buying and selling of contracts for assets (such as commodities, currencies, or indices) at a predetermined price, with the intention of delivering or receiving the asset at a specified date in the future. These contracts are standardized and traded on regulated exchanges, such as the Chicago Mercantile Exchange (CME) or the Intercontinental Exchange (ICE).
Futures contracts have several key characteristics:
1. *Standardized contracts*: Contracts are standardized, meaning they have specific terms and conditions, such as contract size, expiration date, and delivery details.
2. *Leverage*: Futures trading offers leverage, allowing traders to control large positions with a relatively small amount of capital.
3. *Margining*: Traders must deposit margin funds to cover potential losses.
4. *Mark-to-market*: Contracts are marked-to-market daily, meaning gains and losses are settled daily.
5. *Expiration date*: Contracts have a specific expiration date, after which they become void.
6. *Delivery*: Contracts can be settled through physical delivery or cash settlement.
Futures trading is used for various purposes, including:
1. *Hedging*: Managing risk by locking in prices for future transactions.
2. *Speculation*: Betting on price movements to profit from market fluctuations.
3. *Arbitrage*: Exploiting price differences between markets to earn risk-free profits.
4. *Spread trading*: Trading the difference between two related markets to profit from price discrepancies.
Some common futures markets include:
1. *Commodities*: Oil, gold, wheat, corn, and other natural resources.
2. *Currencies*: Major currency pairs, such as EUR/USD or USD/JPY.
3. *Indices*: Stock market indices, like the S&P 500 or Dow Jones Industrial Average.
4. *Interest rates*: Government bonds and interest rate derivatives.