By harvest, corn hits $6.00 in the open market. The manufacturer's contract allows them to buy at $5.00, effectively saving $5,000.
A futures contract is a legally binding agreement to buy or sell a specific asset—such as a commodity, currency, or financial index—at a predetermined price on a set future date. When you "buy" a futures contract, you enter a , committing to purchase the underlying asset at the expiration date, regardless of the then-current market price. The Mechanics of Buying Futures buy futures contract example
Profits and losses are calculated and settled in your account at the end of every trading day. By harvest, corn hits $6
Buying a futures contract does not require paying the full value of the asset upfront. Instead, you post a , which is a small fraction (typically 3–12%) of the contract's total "notional" value. When you "buy" a futures contract, you enter
Every contract specifies the exact quantity and quality of the asset (e.g., one crude oil contract covers 1,000 barrels).
Imagine a cereal manufacturer that needs 5,000 bushels of corn in three months. They fear corn prices will rise, which would hurt their profit margins.
The manufacturer buys one corn futures contract (covering 5,000 bushels) at the current futures price of $5.00 per bushel .