What Kinds of Futures Contracts Exist?
Different types of futures contracts exist; however, the classes are easily divided into two categories. The two groups are commodity futures and financial futures. The categories are classified based on the items that they trade. Regardless of the subject of trade, the two kinds of futures serve the same function. Traders choose the type of contract that they want to be based on personal specification and preference.
The first kind of future is Commodity futures. Production and manufacturing companies to continue trading mostly use commodity futures. The two industries use the contract to ensure that they continue accessing the resources necessary for the production of goods. The two sectors use the contracts as a means of speculation and risk hedging. The industries try to avoid a scenario where they cannot afford to purchase or sell items because of price fluctuations. Sometimes, some of the futures contracts involve cash settlement whereby a company asks for payment later. In commodities contracts, the arrangements are expected to be delivered to the buyer and seller. However, the companies cancel the contracts with matching contracts before the expiry of the agreement. You refer to the buyer of the contract as the long while the seller is referred to as the short.
The second kind of futures contracts is financial futures. Financial futures involve the trading of items that cannot be delivered upon maturity, for example, index. Financial futures present a way for individuals to trade the items by using a contract. Furthermore, futures contracts are exchanged on the maturity day because the items cannot be delivered. However, not all financial futures contracts involve non-deliverable elements. Some contracts include commercial items such as stock, which can quickly be delivered upon maturity. Nonetheless, many individuals use the agreement to hedge against risk and to speculate upon prices, although some individuals are openly interested in making a profit from the trading of futures contracts.
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