Because you control a large asset with a small deposit, small price changes can lead to significant gains or losses that may exceed your initial investment. Buying Example: The Cereal Manufacturer (Hedging)
A speculator with no interest in owning actual oil believes prices will rise due to geopolitical tension. What Are Futures? How Futures Contracts Work buy futures contract example
By harvest, corn hits $6.00 in the open market. The manufacturer's contract allows them to buy at $5.00, effectively saving $5,000. Because you control a large asset with a
Buying a futures contract does not require paying the full value of the asset upfront. Instead, you post a , which is a small fraction (typically 3–12%) of the contract's total "notional" value. How Futures Contracts Work By harvest, corn hits $6
If corn drops to $4.00, they are still obligated to pay the contract price of $5.00. While they lose money on the contract, they benefit from lower costs in the physical market, "locking in" their budget. Buying Example: The Individual Trader (Speculation)
Every contract specifies the exact quantity and quality of the asset (e.g., one crude oil contract covers 1,000 barrels).
Imagine a cereal manufacturer that needs 5,000 bushels of corn in three months. They fear corn prices will rise, which would hurt their profit margins.