Equity futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price.
Moderate - tried and tested
Enabling conditions and success factors
- Reasonably sophisticated financial market needed.
- Investors can use futures contracts to speculate on the direction in the price of an underlying asset.
- Companies can hedge the price of their raw materials or products they sell to protect against adverse price movements.
- Futures contracts may only require a deposit of a fraction of the contract amount with a broker.
Challenges and risks to implementation
- Investors have a risk that they can lose more than the initial margin amount since futures use leverage.
- Investing in a futures contract might cause a company that hedged to miss out on favourable price movements.
- Margin can be a double-edged sword, meaning gains are amplified but so too are losses.