Commodity Futures Contract

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Commodity Market

    A physical or virtual marketplace for buying, selling and trading ...
  2. Dalian Commodities Exchange - DCE

    One of China's four futures exchanges. It is located in Dalian, ...
  3. Sugar No.11

    A futures contract for the physical delivery of raw cane sugar. ...
  4. Chicago Board Of Trade - CBOT

    A commodity exchange established in 1848 that today trades in ...
  5. Clearing House

    An agency or separate corporation of a futures exchange responsible ...
  6. Futures Contract

    A contractual agreement, generally made on the trading floor ...
Related Articles
  1. Interpreting Volume For The Futures ...
    Options & Futures

    Interpreting Volume For The Futures ...

  2. How Companies Use Derivatives To Hedge ...
    Active Trading

    How Companies Use Derivatives To Hedge ...

  3. What do the S&P, Dow and Nasdaq futures ...
    Investing

    What do the S&P, Dow and Nasdaq futures ...

  4. Who sets the price of commodities?
    Investing

    Who sets the price of commodities?

comments powered by Disqus
Hot Definitions
  1. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center