How Do Oil Futures Work?

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An oil future is an obligation from one party to another to pay money in the event of a stipulation, such as if oil reaches a particular price per barrel. Research unregulated oil futures with information from a portfolio manager in this free video on finance.

Part of the Video Series: Credits, Stocks & Pension
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Video Transcript

Are you an investor and used to using puts and calls on stocks? Hi, this is Roger Groh of Groh Asset Management. Well, puts and calls are great for retail businesses, generally, here in the United States. But for the overwhelming majority of commodities and larger accounts, they don't use puts and calls. They use futures. They work the same way. It's an obligation from one party to another to pay money if an event happens. For instance, if we were talking about oil futures. If I were buying a future from you, I might say, "You owe me 10,000 dollars if oil hits 50 dollars a barrel in the next 30 days." I might pay 1,000 dollars to you for that future. So if it hits 50, you owe me 10 grand. If it doesn't, you keep the 1,000 and go home. You can tweak that in any way, shape, or form as this business is totally unregulated. Why does the futures business exist? It's greed. Well, partially, yes it is, where one party is betting that there will be rapid moves in prices in either way -- up or down -- and they'll make money on that. In other cases, they're used as hedges to secure financial positions that a group has, in this case, oil prices. If I were an airline today, I'd be buying oil futures out the nose to lock in today's fuel price for the next year or two, as many experts believe that oil prices will move back up. Hope that helps as an example. I'm Roger Groh. Talk to a professional before you do this, otherwise you are going to lose your shirt. Thank you very much for spending time with me.

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