Financial term of the Week

FUTURES are financial contracts that obligate the buyer to purchase or the seller to sell an asset at a predetermined price on a future date. These assets can be diverse, ranging from physical commodities like oil and gold to financial instruments like stocks and currencies.

Futures are standardised agreements traded on exchanges like the Zimbabwe Mercantile Exchange (ZMX) or the Intercontinental Exchange (ICE). They specify the quantity of the underlying asset, the delivery date, and the price (known as the delivery price).

Future are not always settled with physical delivery; many contracts are cash-settled, meaning the difference between the agreed-upon price and the market price at the expiry date is settled in cash. Futures are used to manage risk (hedge) by locking in a price for an asset in the future.

For example, farmers can use futures contracts to lock in a selling price for their crops before they’re harvested, protecting them from potential price drops. Sone use futures to take calculated bets (speculation) on the price movement of an asset.

If you believe the price will go up, you can buy a futures contract and sell it later for a profit if your prediction is correct. Futures markets play a crucial role in determining the market price (price discovery) of an asset.

The constant buying and selling of futures contracts reflects supply and demand dynamics, influencing the spot price (current market price) of the underlying asset.

To enter a futures contract, you need to deposit a margin, which is a percentage of the contract value, to act as collateral and mitigate potential losses.

You, however, have to remember that futures markets can be highly volatile, meaning prices can fluctuate significantly, leading to potential risks for both buyers and sellers.

Futures markets are heavily regulated to ensure fair trading practices and prevent manipulation.