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Financial futures are any type of futures contracts that are structured with the purchase or sale of a specific type of financial instrument. Typically, the configuration of a financial future calls for the application of a short-term interest rate,a or STR. While this is not always the case, the market value of a financial future will generally move in a direction that is in opposition to the current movement of the prevailing interest rates.
There are several different types of financial instruments that may be utilized in a financial future investment strategy. Certificates of deposit are often the focus of futures investing, as are Treasury bonds. Foreign currencies are also a popular option for this strategy. In all incarnations, the instruments used as the basis for the futures contract will include a specific future date and a specific price that will govern the purchase or the sale. Typically, the date will be for some time within the next twelve months, more often between three and six months.
With proper planning and projection, investors can earn a decent return by utilizing a financial future approach. For example, if some type of foreign currency is the financial instrument of choice, the investor will want to project future movement of that currency over a specified period of time, and identify a future date that is ideal for completing the purchase or sale. Determining the price that is likely to benefit the investor depends greatly on how the currency is expected to perform in the period between the current date and the future date. Assuming that the investor evaluates market conditions correctly, and the currency performs as projected, the investor exercises the option to buy or sell on the future date, using the specified price, and is positioned to benefit from that transaction.
As with any type of investment approach, going with a financial future scheme is not without some degree of risk. While the use of instruments that have a relatively low volatility rate, such as certificates of deposit, help to minimize that risk to some degree, there is always the possibility of unanticipated events in the general economy or the market place that have an adverse effect on the outcome of the futures contract. Acts of nature, as well as unanticipated political shifts, are two examples of factors that may suddenly appear and alter the course of the investment. For this reason, the smart investor balances his or her involvement with futures contracts with other investment opportunities that can help offset any losses sustained due to these unforeseen circumstances, and protect the integrity of the investment portfolio.
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