Issue #7: Futures
Welcome to Issue Seven of Finance “Yoga” with Emmanuel Inyada. This week we will continue our discussion on Derivatives started in Issue Five. We will be looking at “Futures”.
This is an easy read.
Futures also known as futures contract is a standardised derivative contract to buy assets or commodities at a preset price and at a preset time or date in the future. It is a financial contract that gives the parties the obligation to buy or sell the underlying asset at sepcified price at a specified time and date in the future.
Etymology of the Term
The term “future” itself which has its root in the Latin term futurus meaning “going to be, yet to be, about the future” has its early record of use in the English language in the late 14th Century.
The earliest recognised futures trading exchange was the Dojima Rice Exchange established in Japan in 1710. There are also records of the trading of commodity futures in the West in the 16th Century. The futures market has evolved into more efficient and complex forms all over the world with leading examples from the USA and the UK.
Unlike options which is a right to purchase an underlying asset at a future point in time, futures grants an obligation to the buyer to purchase the asset and an obligation to the seller to sell the asset at a future point in time.
The assets often traded under futures include commodities, stocks and bonds.
Futures traders either hedge or speculate. They hedge to prevent losses from potentially unfavorable price changes in the market, that is where there is a fall in the price of the asset or commodity. Usually it is the party using or producing the underlying asset that does this.
They speculate to take advantage of a potentially favourable increase in the price of an underlying asset or commodity. So, if a trader buys at a fixed price to be delivered and completed at a future date, and on the day of delivery there is an increase in the price of the asset or commodity, the trader makes a profit.
Use in a Sentence
So now we can say:
“In 2010 Hannah bought some futures hoping to make a good profit.”
“To manage risks, the company participates heavily in the futures market.”
You can learn more about futures and the role it plays in today’s financial market by contacting me or by reading up more through an internet search. It is easy.
That will be all for this week on Finance “Yoga” with Emmanuel Inyada. We continue our discussions on derivatives next week.
Remember, finance is not that hard.
See you next week!
About the Author
Emmanuel Inyada is a Lagos based legal practitioner with growing experience in dispute resolution, energy and finance law. He is the Co-founder of Law Axis 360°. You can reach him at firstname.lastname@example.org
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