Futures Contract

A futures contract is a standardized agreement to buy or sell an asset (such as commodities, stocks, or currencies) at a predetermined price on a specific future date. These contracts are traded on exchanges and are commonly used for hedging or speculation.

Key Features of Futures Contracts:

• Obligation to Buy or Sell → Unlike options, futures must be settled at expiration.
• Leverage & Margin → Traders can control large amounts of assets with a fraction of the cost.
• Hedging Risks → Businesses use futures to protect against price fluctuations in raw materials or currencies.

For example, an airline may use oil futures to lock in fuel prices and avoid market volatility, and large funds and high wealth portfolio traders may use futures such as ES and NQ to hedge their positions.

A multinational corporation like McDonalds $MCD will attempt to conduct business in local currencies but inevitably there will be challenges. Suppose that the euro was relatively gaining on the US dollar, McDonalds may sell a fraction of their total euro exposure in /6E futures to maintain a certain exchange rate. That way, if the euro continues to gain on the US dollar, the operational exposure gains would be offset by the short /6E, and if the euro retreats against the US dollar, the operational exposure losses would be offset by the /6E short