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Futures Contract Types and Price Deliveries

A forex trader new to the futures market has to deal with several options and ideas before engaging in any trading. Some of the most fundamental facets of the futures markets that he or she must understand are futures contract types and the delivery prices.

While the number of assets that constitute a futures contract are varied (ranging from oil, wheat, sugar, etc), futures contracts themselves come in only two types: the actual delivery of the agreed upon commodity and a cash settlement, which is the more preferred method.

When a futures commodity is delivered to the other party on the specified date, the transaction will be like those of any other business, i.e., the affirmation of purchase or sale is finalized with a receipt.

The abovementioned process is rarely used by forex traders and speculators, because it is with the cash settlement that profits can be made. In a futures cash settlement, the contract is liquidated at a point prior to the settlement date. In short, forex traders, hedgers and currency speculators use the underlying instrument (the commodity) as a means to profit, not necessarily to buy or sell the item.

However, it should be emphasized to the forex trader that, despite being rarely exercised, commodities remain an integral part of the futures market because it is the only way to ensure that the prices agreed upon in a futures contract are accurate, that is, based on real market values.

The determination of values in a futures contract, and the process of arriving at the prices, is a complex situation. As an example, at the conclusion of a trading session, the futures exchange begins the process of assessing the value of each futures contract, which is conducted via a comparison of the highs and lows of the market.

The key element for the forex trader to remember is that the profit can be collected on that very day. This is important, because the prices of contracts in the futures, as in any forex market, changes daily. By the same token, a drop in prices will be charged to your account instantly.

It should also be understood by the forex trader that the amount of gains and losses that can be gained an lost will be heavily affected by the margins and leverage, which varies from broker to broker.

There are other aspects of futures trading that a trader must learn, including options and strategies. However, by understanding future contract types and how prices are arrived at, the individual will have an easier time understanding the other market forces and elements.