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The Financial Times Guide to Investing, 3rd Edition by Glen Arnold

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9

Futures

Futures are contracts between two parties to undertake a transaction at an agreed price on a specified future date. In contrast to buying options, which give you the choice to walk away from the deal, with futures you are committed and are unable to back away. This is a very important difference. In purchasing an option the maximum you can lose is the premium paid, whereas you can lose multiples of the amount you employ in taking a futures position.

A simple example will demonstrate this. Imagine a farmer wishes to lock in a price for his wheat, which will be harvested in six months. You agree to purchase the wheat from the farmer six months hence at a price of £60 per tonne. You are hoping that by the time the wheat is delivered ...

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