Listen to a Business English Dialogue about Futures contacts
Eugene: Hi Aubrey, have you heard about “futures contracts” in finance?
Aubrey: Yes, I have. It’s an agreement between two parties to buy or sell a specified asset at a predetermined price on a future date.
Eugene: That’s correct. Futures contracts are commonly used by traders to hedge against price fluctuations or speculate on future price movements.
Aubrey: Can you explain how futures contracts work in more detail?
Eugene: Sure. Let’s say a farmer wants to lock in the price of their crop before harvest. They can enter into a futures contract to sell their crop at a predetermined price, reducing the risk of price volatility.
Aubrey: How are futures contracts different from options contracts?
Eugene: While both futures and options contracts are derivatives, futures contracts obligate both parties to fulfill the terms of the contract, whereas options contracts give the holder the right, but not the obligation, to buy or sell the underlying asset.
Aubrey: What are some common types of futures contracts?
Eugene: Common types include contracts for commodities like agricultural products, energy, metals, as well as financial instruments like stock indices, interest rates, and currencies.
Aubrey: How do traders profit from trading futures contracts?
Eugene: Traders can profit by correctly predicting future price movements and buying or selling futures contracts accordingly, or by using futures contracts to hedge against price risks in their portfolios.
Aubrey: Are there any risks associated with trading futures contracts?
Eugene: Yes, trading futures contracts involves risks such as price volatility, leverage, and the potential for substantial losses if the market moves against the trader’s position.
Aubrey: How are futures contracts settled?
Eugene: Futures contracts can be settled in two ways: through physical delivery of the underlying asset or through cash settlement, where the difference between the contract price and the market price is paid in cash.
Aubrey: It seems like futures contracts provide a way for market participants to manage risk and speculate on price movements.
Eugene: Absolutely, they’re a vital tool in the financial markets for hedging, speculation, and price discovery.