Welcome to the Futures Market
By Carl Loffmark
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Futures contract
A legal agreement to buy or sell a particular commodity asset, or security, of a standardized quantity and quality, at a price set today for delivery on a specified date in the future. The buyer of a futures contract is obligated to buy and receive the underlying asset for future delivery, while the seller is obligated to provide and deliver the underlying asset for future delivery. Most participants exit their positions before the future contract delivery date, thus avoiding having to make, or take, delivery of the underlying asset. A futures contract is a derivative because it derives its value from the value of the underlying asset.
Futures contract months
Futures contracts typically have certain calendar months which are actively traded, while other months are either not available for trading or are inactive and should be avoided due to insufficient volume. Participants should trade only in contract months which are actively traded with sufficient volume. The price difference between various contract months of the same commodity, or asset, on the same exchange is referred to as intra-commodity spreads.
Price structure
When the spot price of a commodity is lower than the future price the market is in contango. Conversely, when the spot price is higher than the future price the market is in backwardation.
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