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Futures Trading: Are You a Good Candidate?

Who should invest in Futures Markets?

Wikipedia says that “A Futures Market”, is an exchange of financial contracts. What is then a Futures Contract exactly? Futures Contracts or Futures Contract Agreements is an agreement made between two people to purchase certain commodities and financial instruments at a specified price, in the future, go here.

It is important to highlight the Contract. Important to remember that the Futures Market is different than, for example stock shares. Company shares are never purchased or sold. Futures Contracts let investors agree to the amount of an asset (or commodity) such as tons or gallons wheat.

Commodities work in a fairly simple way. Fuel is a good example. A company such as a airline may buy 100 gallons or more of fuel for market value but receive the product later.

Southwest Airlines has made money despite fuel costs of $140/barrel. Futures Contracts were made when oil prices were lower. Delivery was delayed until 2007-2008. After the low oil price, they would purchase Futures Contracts with delivery dates in 2011/2012.

It is important to have a strategic plan but that does not mean it will be used.

Each Futures Contract carries a certain level of risks. Futures Contracts minimize risk through the use of leveraged assets.

Southwest assumed the risk. The company paid additional money if oil prices dropped below contract. In the same way, by presuming that crude oil prices will be higher than contracted price they minimised risks. Leverage was favorable in this situation.

Examine the behavior of oil firms. Due to their belief that the price of crude oil with Southwest would decline below the contracted prices, they minimized their risks. As the oil prices rose, the risk increased. Leverage was not as powerful as it could have possibly been.