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Concept of futures

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  • Concept of futures

    Futures are financial contracts that contain sales of financial instruments or future delivery of physical commodities (generally conducted on commodity exchanges).

    A futures contract is a contract that sells futures, and is a voucher that stipulates that both parties to the transaction will trade at a specific time.

    To put it simply, the buyer and the seller have agreed to deliver the money at a certain moment in the future, and this time, money, and goods are now signed in the contract.

    You may not know much about futures. I will explain it to you with more examples.

    For example, I can presage that kiwi will increase in price after one month, but if I buy the amount of the next month now, it may be rotten before I eat it, so what can I do?

    Me: Boss, let us make a deal. After one month, no matter how much the price of kiwi, I will buy 5 kilograms of kiwifruit with you at 100 dollars?

    Boss: No problem, but for the benefit of both parties, we sign a contract, and you also give a deposit.

    A month later, the current price of kiwi is 25 / one kilogram

    Because I signed a contract, I only need to buy kiwi at 100 dollars, so I made 25 * 5-100 = 25 dollars

    But if there is no price increase, it is 18 / one kilogram

    According to the agreement I need to pay 100 dollars, then I will lose 100 โ€“ 18 * 5 = 10 dollars

    If I take these kiwi home at this time, it is called physical settlement

    If I donโ€™t want these kiwi anymore, selling the kiwi to a fruit shop is called cash settlement.

    Is it easy to understand in this way?