Definition
Financial Futures are futures contracts based on financial instruments. They allow investors to speculate on or hedge against future movements in the financial markets. The value of these contracts typically moves inversely with interest rates: as interest rates rise, the value of financial futures contracts tends to fall, and as interest rates fall, the value of financial futures contracts tends to increase. Common underlying instruments for financial futures contracts include U.S. Treasury bills and notes, foreign currencies, and certificates of deposit.
Examples
- U.S. Treasury Bills Futures - These futures contracts are tied to the future price of U.S. Treasury bills and are used by investors to hedge interest rate risk.
- Currency Futures - These contracts are based on the future value of a foreign currency relative to another. For instance, EUR/USD futures can be used to hedge against fluctuations in the exchange rate between the euro and the U.S. dollar.
- Certificate of Deposit (CD) Futures - These contracts provide a way to hedge against or speculate on future changes in the interest rates paid on certificates of deposit.
Frequently Asked Questions
What are financial futures?
Financial futures are standardized contracts to buy or sell a specific financial instrument at a predetermined price at a future date.
How do interest rates affect financial futures?
As interest rates rise, the value of financial futures contracts generally declines. Conversely, as interest rates fall, the value of these contracts tends to increase.
What are some common financial instruments underlying financial futures?
Common financial instruments include U.S. Treasury bills and notes, foreign currencies, and certificates of deposit.
Why do investors use financial futures?
Investors use financial futures for hedging against adverse price movements in financial instruments or speculating on future market directions.
What is the difference between financial futures and other types of futures?
Financial futures are based on financial instruments like bonds and currencies, while other types of futures, like commodity futures, are based on physical goods like oil or wheat.
Related Terms
- Futures Contract: A legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.
- Interest Rate: The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan amount.
- Hedging: An investment strategy used to reduce the risk of adverse price movements in an asset.
- Speculation: The act of trading in an asset or conducting a financial transaction that has significant risk of losing value but also holds the expectation of a significant gain.
Online References
Suggested Books for Further Studies
- “Options, Futures, and Other Derivatives” by John C. Hull
- “Trading Futures For Dummies” by Joe Duarte
- “The Complete Guide to Futures Markets” by Jack D. Schwager
Fundamentals of Financial Futures: Finance Basics Quiz
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