Index futures are futures contracts where a trader can buy or sell a financial index today to be settled at a future date. Index futures are used to speculate on the direction of price movement for an index such as the S&P 500. Investors and investment managers also use index futures to hedge their equity positions against losses.
Index futures, like all future contracts, give the trader or investor the power and the commitment to deliver the cash value based on an underlying index at a specified future date. Unless the contract is unwind before the expiration through an offsetting trade, the trader is obligated to deliver the cash value on the expiry.
Index futures are derivatives meaning they are derived from an underlying asset the index. Traders use these products to exchange various instruments including equities, commodities, and currencies. For example, the S&P 500 index tracks the stock prices of 500 of the largest companies in the United States. An investor could buy or sell index futures on the S&P to speculate the appreciation or depreciation of the index.
Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. Here, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.
It’s important to note the distinction between options and futures. Options contracts give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of the contract.