Martin Lee @ Sg
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What are Futures?

A futures is an agreement between 2 parties to buy/sell a certain asset on a future date. It is typically used by people dealing in that commodity to hedge their position.

For example, oil might be trading at US$100/barrel now.

In the futures market, a company that uses oil in its daily operation might want to buy a 1-month futures at US$105/barrel if they think the price of oil is going up. Similarly, a company that produces oil can sell the futures to lock in their future selling price. The price of the futures will be higher than the current rate if people are bullish and vice versa.

This means that no matter what happens to the price of oil in a month, the company can (and have to) transact at the agreed price. Unlike options, for futures you are required to exercise your right when settlement comes.

The way the futures market work is that no actual exchange of product takes place. Rather, the price difference is used to determine the profit or loss.

In my example above whereby the company bought a $105/barrel futures, if price of oil goes up to $110, the company will be better off by $5/barrel than if it would have if it didn’t buy the futures.

If it drops to $95, it will be worse off by $10/barrel.

Futures are traded in contracts. Each contract will be equal to a certain quantity of the underlying asset.

There are futures for all sorts of things, from commodities to prices of financial products. It is also a leveraged product, which means you can lose your pants if you are using it for speculative trading and your trade goes against you.

CFDs would be another instrument which is very similar to futures.

Leave a Comment:

Apple says 11 years ago

How to trade the singapore future and open the account ?

    Martin Lee says 11 years ago

    Hi Apple,

    you can buy it from one of the few futures trading platforms in Singapore. Eg Phillips futures (poems)

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