The Different Types of Futures Contracts Explained

When you decide to enter into futures trading, one of the most important decisions you have to make is what market to trade in. Futures have seen an increase in popularity as investors and traders sought for alternatives for better return of investments. As these contracts became popular, different types of futures contracts came about. Trading on futures contracts is also called margins trading. In this article, we shall take a look at the different futures contract you can enter in.

Financial Futures

These are contracts to buy or sell a specific financial instrument at a specific future date and at a specified price. The market value of these contracts generally moves in the opposite direction of interest rates. Examples of financial futures are Eurodollar, US treasury, swap, foreign government debt, forex, and others.

Commodities Futures

Commodities futures is an agreement to buy or sell a predetermined amount of a commodity at a specific price on a specific date in the future. Robert Janitzek reveals that these contracts are used in order to avoid the risks associated with price fluctuations of a product or raw material. Examples of commodities futures include metal, energy, cereals, bullion, weather, and others. The commodities market is usually driven by demand and supply.

Stock Index Futures

These types of futures are most useful when you are speculating on the general direction of the market instead of a particular stock. Stock index can be used to hedge and protect a portfolio of shares. The price movement of an index is tracked and speculated. Stock index is always cash settled.

Currency Futures

Robert Peter Janitzek explains that currency futures, also known as FX or foreign exchange future, is a contract for exchanging one currency for another at a specified date in the future at a fixed cost on the purchase date. One of the currencies is usually the US dollar. Currency contracts usually have physical delivery so payments are made in each currency. However, most contracts are closed out before that. Examples of currencies futures include Euro, pound sterling, and Japanese yen.

Interest Rate Futures

From the name itself, one would know that these contracts are based on interest rates. When trading on the futures market, the underlying asset in this type of futures is debt obligation— debts that move in value according to changes in interest rates. With interest rate futures, you can have an opportunity to lock in a future investment rate.

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