CT1-11 Futures

[Howard O'Connor]

Hi all
Just a query about futures:
In CT1-11 page 24 fourth paragraph the notes read, “For example, if you agree to buy a future and then the price of the underlying asset, and hence the future, goes down…” Why does it refer to someone who agrees to buy a future and not simply to someone who actually buys a future and then the future’s price goes down? What mechanism is there for agreeing to buy a future in a way that is legally binding? Is this an example of a derivative of a derivative – as the investor is speculating on the future price of a future?
Thank you

 

[John Lee]

Hi all
Just a query about futures:
In CT1-11 page 24 fourth paragraph the notes read, “For example, if you agree to buy a future and then the price of the underlying asset, and hence the future, goes down…” Why does it refer to someone who agrees to buy a future and not simply to someone who actually buys a future and then the future’s price goes down? What mechanism is there for agreeing to buy a future in a way that is legally binding? Is this an example of a derivative of a derivative – as the investor is speculating on the future price of a future?
Thank you

The future is a derivative and so its price depends on the underlying asset. So you could say the futures price goes down or you could say the underlying asset's price goes down. They are synonymous.