A futures contract is a legally binding commitment between two parties to buy or sell a specific financial instrument at a given future date at a price set at the time of dealing.
One of the main features of futures is the leverage they provide. With relatively little capital, usually just a small percentage of the contract's value, buyers and sellers are able to participate in the price movement of the full contract. As a result, the leverage can lead to substantial returns on the original investment. However, it can also lead to substantial losses. The risks associated with futures can be significant and investors must fully understand the risks before buying or selling futures contracts.
Generally speaking, futures contracts can serve three objectives: pure trading, hedging and arbitrage.
Pure trading is mainly based on unidirectional investment strategies, where an investor buys or sells a specific quantity of futures contracts based on his own projection of the movement of an underlying stock or an index.
The purpose of hedging is to offset the negative impact of market moves on a portfolio’s overall return.
Arbitrage refers to profiting from the difference between the prices of similar financial instruments in the futures and securities markets by buying low in one market and selling high in another.