A financial contract is a deal in the form of an independently arranged agreement, contract, or an option to sell, buy, swap, lend, or repurchase, or some other similar independently arranged transaction that is typically entered into between parties participating in the financial markets.

Financial Contract Law and Legal Definition

A contract is a promise or set of promises that are legally enforceable and, if violated, allow the injured party access to legal remedies. Financial contract law recognizes and governs the rights and duties arising from agreements. A financial contract typically includes:

  • Securities
  • Currencies
  • Commodities
  • Interest or other rates
  • Other economic or financial interests

A financial contract is most commonly entered into based on the desire from the counterparty to receive a quotation or bid, or to entertain the objectives of the counterparty.

What Are Futures?

A futures contract is an agreement to buy or sell something at a future date, for an agreed-upon price. Typically, the items being exchanged are either a financial instrument or a commodity. Futures contracts identify the quantity and quality of the item being exchanged. There are thousands of these contracts exchanged on a daily basis, and, therefore, they are issued in a standardized format to streamline the process.

Most futures contracts are settled in cash but some require the physical delivery of the product. Futures contracts are advantageous to traders and investors because they're allowed to use very high percentages of leverage relative to other stock markets.

Futures contracts are typically used to speculate on price movements in an asset that will occur at a future date. For example, a producer of soybean may use futures to confirm a specific price at a future date in order to reduce risk. Also, traders and investors may speculate on the price of soybean by shorting it or going long using futures.

When two parties initiate a futures contract both parties must buy or sell the asset at the negotiated price. On the other hand, an options contract simply gives one party the option to buy or sell an asset; they are not forced to execute the contract.

Futures Speculation

Farmers or investors may participate in a futures contract if they believe the price of the product or asset will be moving higher or lower in the future. For example, if a farmer is selling soybean today for $60 per bushel but believes the future price of soybean will be $90, they may purchase a futures contract today that guarantees them the ability to purchase a bushel in the future for $60. The farmer would therefore be purchasing the soybean at $60 and selling it in the future at the current spot rate of $90.

Please keep in mind that the future price of soybean could have decreased rather than increased. In this case, the farmer would have lost money. On the contrary, if the farmer thought the price of soybean was going to go down, they could sell soybean in a futures contract at $60 and purchase it at the current spot rate of $40.

Futures Hedging

A hedge is utilized when an investor is intending to offset possible gains or losses that may happen from a current investment. Simply put, a hedge is a risk management strategy that's utilized to reduce any significant gains or losses incurred by an organization or individual.

The party hedging must be producing or using the asset or product in a futures contract. Remember, when one party is gaining from a futures contract, there's another party that is losing. The effect of hedging is that it forces the market to formulate an efficient current market price.

Financial Services Agreement Basics

A financial services contract is typically made between you and your financial advisor. The contract will identify business relationships and will help bring all parties up to speed regarding financial health issues, service fees, and points of contact. A financial services contract should be used in the following circumstances:

  • A financial advisor is managing your money.
  • You've been hired as a financial advisor to manage other individuals money.

A financial services contract may also be referred to as an Agreement for Financial Services or as a Investment Management Services contract.

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