Final answer:
A futures contract is a financial contract that allows an investor to buy or sell an asset at a predetermined price and date in the future. It is used as a hedging tool to protect against price fluctuations and manage risk. Investing in a futures contract does not guarantee a profit for the buyer or the seller, but provides an opportunity for both parties to benefit based on their positions and the market movement.
Step-by-step explanation:
A futures contract is a financial contract that allows an investor to buy or sell an asset, such as a commodity or a currency, at a predetermined price and date in the future. It is used as a hedging tool to protect against price fluctuations and manage risk.
Investing in a futures contract does not guarantee a profit for the buyer or the seller. Instead, it provides an opportunity for both parties to benefit based on their positions and the market movement. For example, if the buyer expects the price of the asset to increase, they can buy a futures contract at a lower price and sell it at a higher price in the future, making a profit. On the other hand, if the seller anticipates a price decrease, they can sell the futures contract at a higher price and buy it back at a lower price, also resulting in a profit.
However, it's important to note that futures contracts involve risk, and losses can occur if the market moves against the position taken. The contract guarantees the sale of the asset but not the sale price, as it is determined by market forces.