Chapter 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.
Example - A futures contract
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 ...
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