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Essentials of Futures PDF |
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Financial Futures
In addition to commodities and currencies, financial futures are an important part of the futures market. The financial futures market, which began in 1972, was created to meet changing cash-flow needs and risks facing businesses, governments and individual investors.
Today, the financial futures market includes trades on the ups and downs in interest rate instruments, stocks or stock indices. For example, individuals who have a variable rate loan or mortgage may want to use financial futures to hedge their exposure to rising rates.
Participating in the Financial Futures Market¹
Until recently, individual investors had difficulty getting involved in the financial futures market because of the risk involved and the time needed to monitor investments. Today, however, there are a variety of ways for investors to participate in financial futures.
- Trade your own account
- Have a financial professional manage your account
- Invest in a managed futures mutual fund or private offering
Benefits |
Risks |
Hedge against inflation risk
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Price swings that can be sudden and sharp |
| Potential to profit from or hedge against changes in interest rates |
Potential to add leverage, which may benefit you when prices move in the direction you anticipate, but hurts you when prices move in the opposite direction |
| Potential high volatility, which can provide opportunity as well as increase risk |
Potential high volatility, which can provide opportunity as well as increase risk |
| Capital efficiency—you can make a much larger investment using a much smaller amount |
Potential that a market may not be liquid for a contract that you have previously bought or sold |
| Ease of entry and exit—it’s easy to get in and out of positions in popular and liquid futures markets |
Different degrees of probable risk and reward, as with investing in stocks or bonds |
| Variety of contracts for trading on interest rate differentials and indices |
Financial futures require continuous monitoring |
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Potential loss of more than the original investment (due to the use of buying on margin) |
 
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¹ Each of the options listed here has its own risks, which an investor should review carefully with their financial advisor prior to making any investment decision.
This educational piece is not intended to be comprehensive. Before investing in managed futures, be sure to discuss them with your financial advisor to make sure they are appropriate for your time horizon, risk tolerance and objectives. Investors should be aware that there are risks, special costs and requirements associated with financial futures and that they may not be appropriate for all investors. When owning futures, investors should consider the impact and risk of maintaining a margin account. Margin is defined as borrowing money from a broker/dealer to purchase securities. It is sometimes called “buying on margin.” Should an adverse price movement affect your securities, a margin call will be issued, which demands additional investment to cover the loss. Failure to meet a margin call can result in losing more than your original investment. Futures should be regarded as short-term trading vehicles and should be regarded as inappropriate for anyone who is unable or unwilling on short notice to access other financial assets in order to meet margin calls on open futures positions.
The information provided here is intended to be general in nature and should not be construed as investment advice or a recommendation of any specific security or strategy. |
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