--- title: What is a Futures Contract and how does it work? description: A Futures contracts is a legal agreement to buy or sell an asset in future at a fixed price. They are used by investors & speculators for profit & hedging. image: https://www.financialplanningindubai.com/hubfs/Future%20Contracts-1.png --- [![Financial_Planning_in_Dubai_logo](https://www.financialplanningindubai.com/hs-fs/hubfs/Financial%20Planning%20in%20Dubai%20Logo_9090-2.png?width=90&height=90&name=Financial%20Planning%20in%20Dubai%20Logo_9090-2.png "Financial_Planning_in_Dubai_logo")](https://www.financialplanningindubai.com/?hsLang=en-gb) - [Home](https://financialplanningindubai.com/) - [Blog](https://www.financialplanningindubai.com/blog) - [Services](https://www.financialplanningindubai.com/services) - [Islamic Investments & Takaful Plans](https://www.financialplanningindubai.com/blog/salama-hyat-plus-takaful-plan) - [Medical Insurance](https://www.financialplanningindubai.com/blog/topic/medical-insurance) - [Free Resources](https://www.financialplanningindubai.com/free-finanical-tools) - Tools - Calculators - [S&P 500 Investment Calculator](https://financialplanningindubai.com/sp-500-investment-calculator/) - [Life Insurance Calculator](https://www.financialplanningindubai.com/life-insurance-calculator) - [SIP Calculator](https://financialplanningindubai.com/sip-calculator/) - [Lumpsum investment calculator](https://www.financialplanningindubai.com/lump-sum-investment-calculator) - [Inflation Calculator](https://www.financialplanningindubai.com/inflation-calculator-uae) - [Net-Worth Calculator](https://www.financialplanningindubai.com/blog/free-personal-balance-sheet-template-networth-statement) - [The Best Budget Planner for Expats](https://www.financialplanningindubai.com/expat-budget-planner) [Book A Discovery Call](https://www.financialplanningindubai.com/meetings/damodhar?hsLang=en-gb) # What is a Futures Contract and how does it work? ![Damodhar Mata](https://app.hubspot.com/settings/avatar/e63bc971ec29ebe6c012fd042c1a8215) [Damodhar Mata](https://www.financialplanningindubai.com/blog/author/money-mata-aka-damodhar-mata) 27 Apr 2020, 10:48:28 ###### [Investments](https://www.financialplanningindubai.com/blog/topic/investments) ## What is a Future Contract? #### A Futures contract is a legally binding agreement to buy or sell an asset at a future date at a pre-determined price. Businesses use Futures contracts to lock in a fixed price for raw materials such as Oil/Wheat/Corn, etc. Farmers use them to secure buyers at a fixed price for their produce. Futures contracts are a blessing, especially for farmers who produce perishable crops(Eg: Onion, Tomato etc..) and for businesses which produce/use goods which require huge storage facilities, e.g. Oil, Natural Gas etc... Producers, traders and manufacturers use Futures Contracts to secure the sale/purchase and delivery of goods at a specific price. Speculators and investors also use them to profit from the price movements of the commodity.  Such contracts are facilitated and regulated by Futures Exchanges like the [Chicago Mercantile Exchange](http://www.cmegroup.com/), the [Chicago Board of Trade](http://www.cmegroup.com/company/cbot.html), and the [New York Mercantile Exchange](http://www.cmegroup.com/company/nymex.html). ### How it all started? The Futures contract, as it is known today, evolved as producers and traders/manufacturers agreed to exchange goods and cash at a specific date/month in the future. **For Example;** John, a farmer, agreed with Smith, the wholesaler; in January, to deliver 5000 bags of rice after the harvest in April for $1/bag. Such an agreement benefited both John and Smith. John is confident that he had a ready buyer for his produce @ $1/bag, and Smith knows his purchase price in advance, helping him plan his inventory, selling strategy and cash flows. Upon agreement, Smith paid John, a token advance of $500 to seal the Future contract.  John is now bound by the contract to deliver 5000 sacks of rice by April to Smith, no matter how good or bad his harvest is. On the other hand, Smith has to pay John, $1/bag and take the delivery 5000 bags of rice irrespective of the prevailing price in the market. Over some time, such contracts became more common, and even banks started accepting them as collaterals for loans. People also began to buy or sell such agreements before the actual delivery date.  **Continuing from the above example**, If Smith decided he didn't want the rice, he would sell the contract to someone who did. Or, if John, didn't want to or could not deliver the rice as agreed, he might pass on his obligation to another farmer. The price of the contract would go up or down, depending on the demand for rice in the market.  If the harvest were not so good, then the supply would be low, many buyers would be willing to pay more than usual to buy this contract/commodity from Smith. On the other hand, if the harvest were better than expected, many sellers would be happy to buy this contract from John to supply at a pre-determined price.  Slowly but steadily, people who had no intention of ever buying or selling a particular commodity started trading these contracts. They were the speculators who were hoping to benefit from the price movements of a commodity.  ### Should I invest in Futures Contracts? Like every other investment, Futures Contracts can also be a part of your portfolio, depending on your goals, risk appetite and your understanding of such assets.  Unlike Stocks, Bonds, ETFs and [Mutual Funds](https://www.financialplanningindubai.com/blog/what-is-a-mutual-fund-and-what-are-its-benefits?hsLang=en-gb); Futures Contracts are more complex, volatile and risky. As an investor, you should avoid this asset class unless you understand the nature of such contracts very well, and **you intend to speculate**. Moreover, speculation of any kind should not be more than 5.00% of your investment portfolio.  ### Holistic Financial Planning Holistic Financial Planning goes far beyond buying or selling financial products. It helps you identify and align your investments to your life goals.  Holistic Financial Planning not only helps you set a course of action, but it also helps you stay calm and remain focussed to your goals during volatile market situations. As an Independent Financial Advisor, I help my clients set up a holistic financial plan at the outset and recommend suitable solutions matching their needs and goals. I can help you build your financial plan based on your goals and dreams and review it regularly to ensure we are progressing towards achieving them. Arrange a Free Consultation to set the ball rolling...  [![Click Here to Arrange a Free Consultation](https://hubspot-no-cache-eu1-prod.s3.amazonaws.com/cta/default/2672634/3a1f3c56-7c62-45e9-be25-42598cc31533.png)](https://hubspot-cta-redirect-eu1-prod.s3.amazonaws.com/cta/redirect/2672634/3a1f3c56-7c62-45e9-be25-42598cc31533) ![Damodhar Mata](https://app.hubspot.com/settings/avatar/e63bc971ec29ebe6c012fd042c1a8215) [Damodhar Mata](https://www.financialplanningindubai.com/blog/author/money-mata-aka-damodhar-mata) Author, Blogger & Independent Financial Advisor. My goal is to give you actionable tools for creating passive income and building wealth. More than 10,000 expats have already used my ideas to jumpstart their journey towards financial independence. Connect with me to start yours... Share this article on [mailto:?subject=Check%20out%20What%20is%20a%20Futures%20Contract%20and%20how%20does%20it%20work?%20&body=Check%20out%20https://www.financialplanningindubai.com/blog/what-is-a-future-contract-and-how-does-it-work](mailto:?subject=Check%20out%20What%20is%20a%20Futures%20Contract%20and%20how%20does%20it%20work?%20&body=Check%20out%20https://www.financialplanningindubai.com/blog/what-is-a-future-contract-and-how-does-it-work) ##### Read more - [The Real C-Suite – The Only Title That Matters 🏆](https://www.financialplanningindubai.com/blog/breadwinner?hsLang=en-gb) - [The Wealth Secret 99% of Investors Ignore – Will You?](https://www.financialplanningindubai.com/blog/the-iceberg-of-investing?hsLang=en-gb) - [From Risk to Reward? The Shifting Case for China Investing](https://www.financialplanningindubai.com/blog/from-risk-to-reward-the-shifting-case-for-china-investing?hsLang=en-gb) ## Further Reading [![Top 7 Reasons Why I Use Zurich Futura Whole Life Insurance?](https://www.financialplanningindubai.com/hs-fs/hubfs/Imported_Blog_Media/000a-1.jpg?width=300&name=000a-1.jpg)](https://www.financialplanningindubai.com/blog/2015/02/03/why-use-zurich-futura-life-insurance?hsLang=en-gb) ###### [Life Insurance,](https://www.financialplanningindubai.com/blog/topic/life-insurance)[zurich futura review](https://www.financialplanningindubai.com/blog/topic/zurich-futura-review) ##### [Top 7 Reasons Why I Use Zurich Futura Whole Life Insurance?](https://www.financialplanningindubai.com/blog/2015/02/03/why-use-zurich-futura-life-insurance?hsLang=en-gb) **Zurich Futura: A Premier Whole Life Insurance in the UAE** [Read More](https://www.financialplanningindubai.com/blog/2015/02/03/why-use-zurich-futura-life-insurance?hsLang=en-gb) [![Money for Life - Workshop on Lifetime Cashflow Planning](https://www.financialplanningindubai.com/hs-fs/hubfs/Money%20For%20Life%20.jpg?width=300&name=Money%20For%20Life%20.jpg)](https://www.financialplanningindubai.com/blog/money-life-workshop-lifetime-cashflow-planning?hsLang=en-gb) ###### [Financial Planning,](https://www.financialplanningindubai.com/blog/topic/financial-planning)[Investments,](https://www.financialplanningindubai.com/blog/topic/investments)[seminar](https://www.financialplanningindubai.com/blog/topic/seminar) ##### [Money for Life - Workshop on Lifetime Cashflow Planning](https://www.financialplanningindubai.com/blog/money-life-workshop-lifetime-cashflow-planning?hsLang=en-gb) ## Knowing how much you can spend today, and the effect it can have on your future wealth can be... [Read More](https://www.financialplanningindubai.com/blog/money-life-workshop-lifetime-cashflow-planning?hsLang=en-gb) [![4 important reasons why you need life insurance in UAE](https://www.financialplanningindubai.com/hs-fs/hubfs/Why%20you%20need%20life%20insruance%20-%20feature.png?width=300&name=Why%20you%20need%20life%20insruance%20-%20feature.png)](https://www.financialplanningindubai.com/blog/4-important-reasons-why-you-need-life-insurance-in-uae?hsLang=en-gb) ###### [life Insurance in UAE,](https://www.financialplanningindubai.com/blog/topic/life-insurance-in-uae)[Life and Critical Illness Insurance](https://www.financialplanningindubai.com/blog/topic/life-and-critical-illness-insurance) ##### [4 important reasons why you need life insurance in UAE](https://www.financialplanningindubai.com/blog/4-important-reasons-why-you-need-life-insurance-in-uae?hsLang=en-gb) No one wants to die early, but the sad truth of life is that people die sooner or later. [Read More](https://www.financialplanningindubai.com/blog/4-important-reasons-why-you-need-life-insurance-in-uae?hsLang=en-gb) *Damodhar Mata | Your Trusted Financial Advisor in Dubai* ![Damodhar Mata-7-2](https://www.financialplanningindubai.com/hs-fs/hubfs/Damodhar%20Mata-7-2.png?width=119&height=119&name=Damodhar%20Mata-7-2.png) *I can help you grow wealth, gain passive income, and achieve your goals faster and with ease. * **Top Pages** - [Home page](https://www.financialplanningindubai.com) - [Best Life Insurance](https://www.financialplanningindubai.com/best-life-insurance-dubai) - [Best Investment Plan](https://www.financialplanningindubai.com/blog/how-to-invest-in-uae) - [Retirement Planning in the UAE](https://www.financialplanningindubai.com/retirement-planning-in-uae) - [FIRE Early Retirement Guide](https://www.financialplanningindubai.com/blog/early-retirement-in-uae-fire-guide) - [Best Child Education Plan](https://www.financialplanningindubai.com/childrens-education-planning) **Top Blog Posts** - [Financial Planner or Financial Advisor?](https://www.financialplanningindubai.com/blog/financial-planner-or-financial-advisor) - [How to find the Best Financial Advisor](https://www.financialplanningindubai.com/blog/best-financial-advisor-uae) - [Win With Money Challenge](https://www.financialplanningindubai.com/blog/30-days-win-with-money-challenge) - [FIRE guide for expats](https://www.financialplanningindubai.com/blog/early-retirement-in-uae-fire-guide) - [Pay Yourself First](https://www.financialplanningindubai.com/blog/how-expats-in-uae-can-grow-wealth-using-pay-yourself-first-strategy) - [Google Reviews](https://www.financialplanningindubai.com/testimonials-financial-advisor-in-dubai) **Other pages** - [About us](https://www.financialplanningindubai.com/about-us) - [Testimonials](https://www.financialplanningindubai.com/testimonials-financial-advisor-in-dubai) - [Services](https://www.financialplanningindubai.com/services) - [Contact us](https://www.financialplanningindubai.com/contact-us) --- © 2024 Financial Planning in Dubai. All rights reserved. [Follow us on Facebook](https://www.facebook.com/finplandubai/) [Follow us on LinkedIn](https://www.linkedin.com/in/damodhar/) [Follow us on YouTube](https://www.youtube.com/@mytwofils) [Follow us on Instagram](https://www.instagram.com/moneymatadubai) ```json { "@context" : "https://schema.org", "@type" : "BlogPosting", "author" : { "@type" : "Person", "name" : "Damodhar Mata", "url" : "https://www.financialplanningindubai.com/blog/author/money-mata-aka-damodhar-mata" }, "dateModified" : "2020-05-23T05:31:21.718Z", "datePublished" : "2020-04-27T06:48:28.000Z", "headline" : "What is a Futures Contract and how does it work?", "image" : [ "https://www.financialplanningindubai.com/hubfs/Future%20Contracts-1.png" ], "mainEntityOfPage" : { "@id" : "https://www.financialplanningindubai.com/blog/what-is-a-future-contract-and-how-does-it-work", "@type" : "WebPage" }, "publisher" : { "@type" : "Organization", "logo" : { "@type" : "ImageObject", "url" : "https://www.financialplanningindubai.com/hubfs/Financial%20Planning%20in%20Dubai%20Logo_9090-2.png" }, "name" : "Financial Planning in Dubai" } } ``` ```json { "@context" : "https://schema.org", "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "UAE", "addressLocality" : "Emaar Square, Burj Downtown, Dubai,", "addressRegion" : "Emaar Square", "postalCode" : "124422", "streetAddress" : "Building No 1, 4th floor" }, "alternateName" : "Financial Planning in Dubai | Independent Financial Planner", "logo" : "https://www.financialplanningindubai.com/hs-fs/hubfs/New_logo.png?width=100&name=New_logo.png", "name" : "Financial Planning in Dubai | Independent Financial Planner", "sameAs" : [ "https://www.linkedin.com/in/damodhar/", "https://www.facebook.com/finplandubai", "https://twitter.com/finplandubai", "https://www.instagram.com/moneymatadubai/", "https://www.youtube.com/channel/UC-Zc9NxnCZDw0j_HkTerMWw/videos", "https://in.pinterest.com/finplandubai/" ], "url" : "https://www.financialplanningindubai.com/home01" } ```