Define Oil Futures
Oil futures are contracts in which a buyer and seller agree to trade in crude oil for delivery at a specified date in the future. Trading takes place electronically and in futures trading pits at major financial exchanges.
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Futures Basics
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Futures contracts are transacted on commodities. They are bought or sold by speculators who often have no interest in the actual delivery of the product, and hedgers. A buyer purchases a futures contract in hopes of selling for profit.
Hedging
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Hedgers are investors actually interested in the buying and selling of physical barrels of crude oil. Their interest in oil futures is risk management. Hedgers buy futures as a way to offset the probability of losses from the fluctuations of prices. It employs various techniques but, basically, involves taking equal and opposite positions in two different markets such as cash and futures markets, explains Businessdictionary.com.
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Specifics
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Futures contracts are traded in standardized quantities or lots. A contract establishes a specific price and date of delivery for the goods. Buyers never actually receive delivery of the goods, as cash settlements are performed via counter-contracts. The buyer receives cash on gains and pays out on losses.
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References
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