Commodity Futures Contract

What is a 'Commodity Futures Contract'

A commodity futures contract is 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
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    Learn how the notional value of a futures contract is calculated, and how futures are different from stock since they have ... Read Answer >>
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    Commodities are extremely important as they are essential factors in the production of other goods. A wide of array of commodities ... Read Answer >>
  3. How can a futures trader exit a position prior to expiration?

    A futures contract is an agreement to buy or sell a commodity at a pre-determined price and quantity at a future date in ... Read Answer >>
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