Futures

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Futures represent a contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. [1]

Risk

Futures contracts are used to hedge risk. Followers of the Bogleheads investment philosophy should reconsider the use of futures for long-term investing, especially if considering futures with leverage.[2]

Costs of futures contracts

There are associated costs with futures contracts:[3]

Price of the contract
Commissions
Futures contracts do not pay dividends
Opportunity loss of required margin amount (usually calculated by comparing to a 3 month treasure bond)
There is usually a fee for data from the exchange
Very low interest on excess margin

References

  1. Investopedia
  2. What is "Leverage"? on the Bogleheads Forum
  3. ibid.

External links