understanding financial jargon
Futures contracts (or 'futures') are contracts which commit a seller to delivering an asset at a future date for a fixed price. For example if a farmer is worried about this years grain market having a bumper harvest (and so pushing prices down during the harvest period) he may wish to enter a futures contract with a customer to deliver his harvest for a fixed price agreed now, before the harvest yield is known. Similarly a manufacturer using aluminium might be worried about prices rising in a few months time when they may need to buy further supplies. In this case the manufacturer could enter a futures contract to purchase aluminium in a few months time at a price agreed now.
In both examples the farmer and manufacturer have used 'futures' to hedge their positions by agreeing an acceptable price now, as an insurance against potential lost profits or higher costs in the future. Futures can also be used for pure speculation where the buyer buys a future now, but before delivery takes place they sell their futures contract to someone who either wants to own the asset, or to another speculator who is gambling they can still make money out of the future contract.
What to do if you need more help
If you need more help with your specific commercial loan, mortgage or insurance requirement please speak to a professional financial adviser.
We hope you found this information useful.
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