Futures are derivative products that derive their value from the price movement of an underlying
instrument such as Gold, Coffee, a Currency pair, a Stock Index or a Government Bond. They
are essentially contracts with an obligation to buy or to sell an instrument (in a certain quantity)
at or before a fixed time for an agreed price. Futures are traded at large exchanges that
formulate the contract terms. The buyer of a contract holds a long position, the seller of a
contract holds a short position. Futures have a finite lifespan that ends at a preset expiration
date.
They can either be used to hedge investment positions (to mitigate the risk of price movements)
or to speculate (to try and profit from price movements). Futures trading started 150 years ago
as a way to manage agricultural production. Planting and harvesting cycles created swings in
prices and futures contracts were created to manage that risk. They have evolved into the
exchange-traded instruments we know today, which are a key part of the financial system.
