Commodity Futures Contract

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DEFINITION of 'Commodity Futures Contract'

An agreement to buy or sell a set amount of a commodity at a predetermined price and date. Buyers use these to avoid the risks associated with the price fluctuations of the product or raw material, while sellers try to lock in a price for their products. Like in all financial markets, others use such contracts to gamble on price movements.

BREAKING DOWN 'Commodity Futures Contract'

Trading in commodity futures contracts can be very risky for the inexperienced. One cause of this risk is the high amount of leverage generally involved in holding futures contracts. For example, for an initial margin of $5,000, an investor can enter into a futures contract for 1,000 barrels of oil valued at $50,000. Given this large amount of leverage, even a very small move in the price of a commodity could result in large gains or losses compared to the initial margin. Unlike options, futures are the obligation of the purchase or sale of the underlying asset. Simply not closing an existing position could result in an inexperienced investor taking delivery of a large quantity of an unwanted commodity.

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RELATED FAQS
  1. What does the underlying of a derivative refer to?

    A derivative security is a financial instrument in which the price of the derivative is dependent on its underlying asset. ... Read Full Answer >>
  2. What is the history of futures?

    The earliest recognized futures trading exchange is the Dojima Rice Exchange, established in 1710 in Japan for the purpose ... Read Full Answer >>
  3. Are there leveraged ETFs that track the oil & gas drilling sector?

    A few leveraged ETFs are used to track the oil and gas drilling sector, which includes vast, multinational companies such ... Read Full Answer >>
  4. What do the S&P, Dow and Nasdaq futures contracts represent?

    Every morning before North American stock exchanges begin trading, TV programs and websites providing financial information ... Read Full Answer >>
  5. Who sets the price of commodities?

    Commodities are extremely important as they are essential factors in the production of other goods. A wide of array of commodities ... Read Full Answer >>
  6. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>

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