# Futures 101

**Introduction to Futures Trading**

**Futures Contracts** are standardized legal agreements to buy or sell an asset at a predetermined price at a specified time in the future. Futures are traded on exchanges and can involve commodities, indices, currencies, and more.

**How the Futures Market Works**

* **Standardization:** Contracts are standardized in terms of quality, quantity, and delivery time.
* **Margin Requirements:**
  * **Initial Margin:** A percentage of the contract's value required to open a position.
  * **Maintenance Margin:** The minimum account balance required to keep a position open.
* **Mark-to-Market:** Daily settlement of profits and losses based on market movements.

**Key Concepts in Futures Trading**

* **Underlying Assets:**
  * **Commodities:** Oil, gold, agricultural products.
  * **Financial Instruments:** Stock indices, currencies, bonds.
* **Contract Specifications:**
  * **Contract Size:** Amount of the underlying asset.
  * **Tick Size:** Minimum price movement.
  * **Expiration Date:** The date when the contract must be settled.
* **Delivery vs. Cash Settlement:**
  * **Physical Delivery:** Actual exchange of the underlying asset.
  * **Cash Settlement:** Payment of the difference between the contract price and market price at expiration.

**Market Participants**

* **Hedgers:** Use futures to mitigate risk from price fluctuations in the underlying asset.
* **Speculators:** Aim to profit from market movements without any interest in the underlying asset.
* **Arbitrageurs:** Exploit price differences between markets for profit.

**Fundamental Analysis in Futures**

* **Supply and Demand Factors:**
  * **Weather Conditions:** Affect agricultural commodities.
  * **Economic Indicators:** Influence financial futures like indices and currencies.
  * **Global Events:** Geopolitical tensions can impact commodity prices.
* **Reports and Data Releases:**
  * **Energy Information Administration (EIA) Reports:** Affect oil and gas futures.
  * **Crop Reports:** Influence agricultural futures.

**Technical Analysis in Futures**

* **Volume and Open Interest:**
  * **Volume:** Number of contracts traded during a period.
  * **Open Interest:** Total number of outstanding contracts not settled.
  *
    * **Interpretation:** Increasing open interest suggests new money entering the market, indicating strength.
* **Price Patterns:**
  * **Contango:** Futures price is higher than the expected future spot price.
  * **Backwardation:** Futures price is lower than the expected future spot price.

**Advantages of Futures Trading**

* **Leverage:** Control large contract values with relatively small capital.
* **Liquidity:** Many futures markets are highly liquid.
* **Transparency and Regulation:** Exchanges enforce standardized contracts and clear regulations.
* **Diversification:** Access to a wide range of markets and assets.

**Risks in Futures Trading**

* **High Leverage Risk:** Can lead to substantial losses exceeding the initial investment.
* **Market Volatility:** Prices can change rapidly due to various factors.
* **Margin Calls:** If the account balance falls below the maintenance margin, additional funds are required.

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