A futures contract is one of the essential tools in derivatives investment, helping investors minimize risks from price fluctuations. The futures contract in Vietnam market is increasingly developing, offering significant investment opportunities for individuals and businesses. In this article, let's explore with SFVN what a futures contract is, its key characteristics, benefits, risks, and how it can optimize your investment strategy.

 Futures contracts are crucial derivatives investment tools, helping protect assets from price fluctuations

What is a Futures Contract?

A futures contract is a standardized type of derivative contract traded on exchanges, allowing parties to buy or sell an underlying asset at a fixed price at a specific point in the future. The underlying asset can be commodities like crude oil, corn, or financial assets such as stock indices and currencies.Components of a futures contract include:

• Underlying asset: The commodity or financial asset upon which the contract is based.

• Expiration date: The date when the contract expires and is settled.

• Agreed price: The fixed price at present for future transactions.

• Contract size: The standard volume of the underlying asset per contract.

• Price increment: The minimum price movement of the underlying asset.

Unlike forward contracts, futures contracts are standardized and traded centrally on commodity exchanges, such as the Vietnam Commodity Exchange (MXV).

>>> Read more: Comparison of Forward Contracts and Futures Contracts

Futures contracts help investors protect assets from significant price fluctuations

Who Should Use Futures Contracts?

Futures contracts are suitable investment tools for many groups, especially those in the derivatives market for various purposes like hedging risk, speculation, or arbitrage. Key groups include:

• Hedgers: Producers and businesses seeking to protect product prices, like farmers who want to lock in selling prices for the upcoming harvest. Futures contracts help them avoid risks from unforeseen price fluctuations.

• Speculators: Individuals or organizations willing to take on high risk to seek profit from price movements of the underlying asset. Speculators usually don’t need to own the underlying asset; they only aim to profit from price fluctuations.

• Arbitrageurs: These investors leverage price differences across markets to earn profit without bearing significant risk.

Hedgers and speculators can optimize strategies with futures contracts

Where Are Futures Contracts Used?

Futures contracts are centrally traded on derivatives exchanges in both Vietnam and worldwide. In Vietnam, the Vietnam Commodity Exchange (MXV) offering domestic investors access to commodity derivatives like futures contracts. Some prominent international exchanges include:

• Chicago Mercantile Exchange (CME): One of the largest derivatives exchanges globally, listing futures contracts on various commodities and financial assets.

• New York Mercantile Exchange (NYMEX): Specializes in futures contracts for energy products like WTI crude oil and natural gas.

• London Metal Exchange (LME): Focuses on futures contracts for base metals like aluminum, zinc, and copper.

The Vietnam Commodity Exchange is an ideal choice for investors trading futures contracts in Vietnam

When Should Futures Contracts Be Used?

Futures contracts are effective tools for investors and businesses in risk management, especially when anticipating large price fluctuations. If you believe the price of the underlying asset will change significantly in the future, using a futures contract can help you take advantage of this volatility. For businesses, futures contracts are also an effective hedging method, allowing them to lock in purchase or sale prices of raw materials and products, thereby protecting profit and minimizing impacts from rising costs.An example of futures contracts is an airline company might use fuel futures contracts to fix fuel costs, helping control expenses in a fluctuating price environment. However, investors should note risks of futures contracts, as unexpected market changes can result in losses if actual prices move against the initial forecast.

Why Should Investors Use Futures Contracts?

Investors have various reasons to use futures contracts, as they help hedge risk and create opportunities to optimize profits. Given the characteristics of futures contracts, investors can benefit from advantages like:

• Risk mitigation from price fluctuations: Futures contracts allow investors to “lock in” prices for underlying assets, protecting profit and avoiding potential risks from market price volatility.

• Increased liquidity: As they are traded on centralized exchanges, futures contracts have high liquidity, enabling investors to buy or sell positions easily when needed.

• Leveraging financial power for profit gains: Leverage in futures contracts allows investors to control larger positions with a small capital investment, creating attractive profit opportunities. However, this also requires careful risk management.

Features of futures contracts are flexible and effective financial tools for investors in risk control and enhancing profit potential.

Futures contracts help investors reduce price risks, increase liquidity, and create profit opportunities

Conclusion

Futures contracts are effective financial tools that help investors optimize investment strategies and manage risk. With flexibility and price hedging capabilities, futures contracts are an attractive choice for those who want to enhance stability and profitability.

Open a derivatives trading account at SFVN today to start your safe and effective investment journey!