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Futures: What is a futures contract? Everything you should know

After expiry, you can renew your contract and continue to hold the position. Otherwise, you must settle your futures contract using one of two methods: physical settlement or cash settlement.

Physical settlement involves taking delivery of the asset in question, which is common for commodity or foreign currency transactions. For example, suppose an airline wants to lock in fuel prices to avoid cost increases, it may buy a forward contract for a specified amount of fuel for future delivery.

However, some futures market participants may not want to trade the underlying asset at expiration. So they will choose to settle their contracts in cash. It is commonly used by speculators and hedgers who want to take a position on whether the market value is rising or falling, without holding the asset. The only thing exchanged is the equivalent of money.

A large number of speculators and hedgers make the futures market highly liquid but volatile. Rapid price changes can lead to risks, such as slippage – the possibility that your order will be executed at a price that is different from what you requested. Therefore, it is important to adopt risk management strategies.

With us you can add a guaranteed stop loss to your position which will completely remove the risk of slippage. These stops incur a small additional cost only when triggered

Learn more about risk management

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