Contracts, within the context of trading and markets, refer to legally binding agreements that specify the terms under which assets are exchanged. The most common trading contracts are futures, options, and forward contracts.
Futures Contracts: These are standardized agreements to buy or sell a specific asset at a predetermined price at a specified time in the future. Futures are traded on exchanges and are common for commodities, currencies, and financial instruments.
Options Contracts: These provide the buyer the right, but not the obligation, to buy or sell an asset at a specified price before or at a certain date. They come in two types: calls (the right to buy) and puts (the right to sell).
Forward Contracts: Similar to futures but are not standardized or traded on an exchange. They are private agreements between parties to buy or sell an asset at agreed terms on a future date, often used by businesses to hedge against price fluctuations.
Contracts in trading help participants manage risk, speculate on price movements, and ensure future supply or demand of an asset. Understanding the specifics of each contract’s terms, the obligations they impose, and the rights they confer is crucial for anyone involved in trading or investment.
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