In foreign exchange, a future contract is an internationally recognized legal agreement, typically executed by brokers or dealers, to sell or buy something at a definite date in the future, either between parties not necessarily known to each other, yet clearly defined in the future. The object transacted is normally a particular financial instrument or commodity. Futures contracts are traded in two distinct phases-the speculating phases and the hedging phase. The speculating phase involves the buying of a commodity now in the future in the expectation that it will gain value in the future. The hedging phase is exercised when a position is taken against the value of the commodity currently being traded in the future so that if the value goes down in the future it will result in a loss in the present.
Some examples of financial contracts in use today include interest rate swaps, stock index futures, swap agreements, interest rate locking swaps, forward contract arrangements, and credit default swaps. One important aspect of these types of financial contracts is that they make the assumption that the prices for the underlying assets will move smoothly in accordance with the overall financial condition of the issuing broker or dealer. It is also assumed that the risks of the transactions are transferred to the buyer or seller at the point of making the contract. This assumes that market makers and suppliers will continue to offer the products on the future date without interruption.
However, as soon as the contract is made, the risk-takers (buyers) have to start paying back the loaned amount plus the margin they have been given, in order to keep the account balanced. Usually the margin requirements of a future market maker are based on the size of the initial margin, the daily trading volume in a typical day, and the average daily currency exchange rates. In most cases, in order to become a successful margin holder a trader should be able to demonstrate the ability to obtain a profitable margin call option from his or her broker or dealer before the market opens for trading. Furthermore, a successful trader should also be able to successfully manage his or her risk tolerance. Finally, a trader should also have a strong understanding of the underlying asset and fundamental analysis of that particular economic sector in order to determine the price actions to expect.