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What are futures?

A futures contract is a legally binding agreement between a buyer and a seller to buy an underlying asset at an agreed time in the future at a time agreed today. The agreement is referred to as a ‘futures contract’.

Objectives for futures trading include speculation and hedging. ASX 24 provides a venue for buyers and sellers to transact futures contracts and disseminates price and data to users. 

Trading in futures can benefit traders seeking either profit from speculation or protection by hedging. Like any investment, futures have risks you need to understand. You should seek independent advice from a professional adviser before investing.

Futures trading - objectives

There are two types of players in futures markets - speculators and hedgers. Each seeking different outcomes from their trading.

Speculators trade futures in an attempt to profit from price changes. They may trade:

Traders looking to hedge a risk are the main users of futures contracts. A hedger is often involved with the actual physical commodity such as a fund manager, wheat grower, a gold miner or a bank. A wheat grower runs the risk of decreasing prices before being able to deliver the crop to market. A bank that lends money to home buyers runs the risk that interest rates will move.

These risks can be hedged using futures contracts as a type of insurance. 

Terms used in futures trading

When considering futures trading it is important to understand the terms used.

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