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What are Futures?

  • An agreement traded on an organized exchange (i.e. Chicago Mercantile Exchange) at a price established between a buyer and a seller for a commodity that each of them intend to potentially deliver or pay for later.
  • Offsets price risk of a physical commodity.
  • Users take the same initial action in futures that they would later take in their local market; A producer of a commodity would sell futures to establish prices; A buyer of a commodity would buy futures to establish prices.
  • When it is time to make or take delivery of the commodity, futures positions are offset by taking the opposite action that was taken initially (if you first made a sale, you will exit by making a purchase of the exact same futures contract). Less than 1% of futures contracts are ever delivered against.
  • Requires margin to hold the position. A hedgeline-of-credit is recommended for easier management.
  • Provides for possible basis offerings from other buyers, fee savings, and managing market carry when used in place of traditional cash market tools (i.e. hedge-to arrive contracts).