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Imagine an Italian farmer who, months before the harvest, wants to secure a fair price for his wheat, protecting himself from sudden market crashes. Or, an investor who wants to bet on the performance of the entire Milan Stock Exchange without having to buy every single stock. Both can achieve their goals thanks to a financial instrument as powerful as it is complex: the futures contract. Far from being a gamble reserved for a select few, futures are standardized contracts that permeate the global economy, influencing the price of traditional goods, like commodities, and innovative assets like stock market indices.
This article aims to demystify the world of futures in the Italian and European context, explaining in a simple and direct way how they work, what opportunities they offer, and what risks they entail. Whether you are an entrepreneur, a curious saver, or a future trader, this guide will provide you with the fundamentals to understand a pillar of modern finance, a bridge between the tangible nature of commodities and the abstract world of financial markets.
A futures contract is a binding agreement to buy or sell a specific quantity of an asset (the “underlying”) at a predetermined price on a future date. It’s like pre-ordering a product today that will be delivered in three months, locking in the price. These contracts are standardized, meaning that the quantity, quality, and expiration date are defined by the exchange on which they are traded, such as Borsa Italiana’s IDEM (Italian Derivatives Market). The only variable to be negotiated is the price.
How they work is based on two key concepts: financial leverage and margin. Leverage allows you to control a very high notional value by investing only a small portion of capital, called margin. The margin acts as a good-faith deposit to guarantee the commitment. For example, if a futures contract on oil has a value of €50,000, thanks to leverage, you might only need to deposit €5,000 in margin to open the position. This mechanism amplifies both potential gains and potential losses, making futures instruments to be handled with extreme caution.
Commodities were the first underlying asset for forward contracts, blending tradition with financial innovation. Think of goods fundamental to Mediterranean culture like durum wheat, olive oil, or coffee. Futures on these resources allow producers and consumers to manage price uncertainty. This practice is known as hedging. A farmer can sell a wheat future to lock in a selling price before the harvest, protecting against a potential price drop. Conversely, a food company can buy a future to fix the purchase cost of the raw material, safeguarding against a price increase.
Hedging is a defensive strategy, an insurance against adverse price swings. It allows companies to stabilize revenues and plan with greater certainty.
On the other hand, there is speculation. Speculators have no interest in physically owning the asset but aim to profit from price variations. They buy futures if they anticipate a price increase (a long position) and sell them if they expect a price decrease (a short position). Although often viewed with suspicion, speculation is vital for the market, as it provides the necessary liquidity for hedgers to easily find a counterparty.
If commodities represent the real economy, stock index futures measure its financial health. A future on the FTSE MIB index, for example, allows you to invest in the overall performance of the 40 main companies listed on Piazza Affari, without having to buy them individually. This type of contract does not involve the physical delivery of an asset; at expiration, the position is closed by settling the difference between the purchase and closing price in cash.
Here too, the purposes are twofold. An investor with a portfolio of Italian stocks can sell a FTSE MIB future to protect against a market downturn (hedging). Alternatively, a trader can buy a future on the same index if they believe the Italian stock market is set to rise, using leverage to maximize potential profit. These instruments, therefore, allow for efficient and strategic management of exposure to market volatility. Borsa Italiana offers different contract sizes, such as the Mini-FIB and Micro-FIB, to make these instruments accessible even to retail investors with smaller amounts of capital.
To understand how to integrate these instruments into an investment strategy, we turned to Francesco Zinghinì, an Electrical Engineer and founder of advanced financial tools. His perspective combines technical rigor with practical market experience.
“Futures are not just tools for speculators. When used with discipline and understanding, they become a key element of portfolio financial engineering. They allow for the implementation of precise hedging strategies or the assumption of tactical exposures that would be impossible with traditional instruments alone. It’s where quantitative analysis meets strategic vision.”
According to Zinghinì, futures offer unparalleled flexibility. An investor can use them to diversify their investment portfolio, adding exposure to commodities or international markets with a single click. They can also be used for more complex strategies, such as spread trading, which involves buying one future and selling another related one to profit from price differences. However, the expert emphasizes that their use requires solid preparation and rigorous risk management.
Before venturing into the world of futures, it is crucial to carefully weigh the pros and cons. The main advantages include high liquidity, which allows for easy entry and exit from positions, and transparency, guaranteed by trading on regulated markets. The ability to trade on both rising and falling prices and the powerful risk hedging capabilities complete the picture of benefits.
However, the risks are just as significant. Financial leverage, their biggest attraction, is also their greatest danger: it can lead to losses that exceed the capital initially invested. Market volatility can cause rapid and unpredictable price movements, and the complexity of the instrument requires in-depth study before trading. Investing in futures without a clear strategy and proper risk management is a recipe for disaster.
Futures are double-edged swords. On one hand, they represent an extraordinary financial innovation that offers companies and investors the opportunity to manage risks and access global markets efficiently. On the other, their complexity and the effect of financial leverage make them unsuitable for novices or those unwilling to dedicate time to study and planning. In the Italian and European context, instruments like futures on the FTSE MIB or agricultural commodities merge the economic tradition of our region with the most advanced frontiers of finance.
Ultimately, investing in futures is not a shortcut to wealth, but an activity that requires professionalism, discipline, and a deep understanding of market mechanisms. Approaching them with awareness can open up new strategic perspectives for your portfolio, but doing so superficially exposes you to risks that are crucial not to underestimate.
The information contained in this article does not constitute advice, nor is it intended to recommend any investment. Investments involve risks.
A future is a contract that obligates two parties to exchange an asset, such as commodities or financial indices, at a future date and at a price set today. Imagine agreeing today to buy a barrel of oil in three months for 80 euros, regardless of what its market price will be at that time. This standardized agreement allows for making predictions on future prices (speculation) or protecting against unwanted price changes (hedging).
The biggest risk is related to the use of financial leverage. Leverage allows you to control a large market value with a small amount of capital (the margin), amplifying both profits and losses. It is possible to lose more than the capital initially invested. Other risks include market volatility, which can cause rapid price fluctuations, and the risk of not being able to control external events like political factors or natural disasters that affect prices.
You don’t need the full value of the contract, but an ‘initial margin,’ which is a type of security deposit. The minimum amount depends on the broker and the type of contract. For the more accessible ‘micro futures,’ some brokers allow you to start with capital between 500 and 1,000 euros. For larger contracts or more active trading, the required capital can rise to several thousand euros. It is essential to have enough capital not only for the margin but also to cover any potential losses.
The main difference is the underlying asset. Commodity futures are based on physical goods like gold, oil, wheat, or coffee. At expiration, they theoretically involve the physical delivery of the good, although most positions are closed out beforehand. Index futures, such as those on the FTSE MIB or the S&P 500, are based on the value of a basket of stocks. Their settlement is almost always in cash, calculated as the difference between the contract price and the index value at expiration.
Generally, no. Futures are complex, high-risk financial instruments due to financial leverage and their complexity. They are better suited for experienced investors and traders who have a deep knowledge of the markets, good risk management, and a high tolerance for loss. For a beginner, proper education is essential, and it’s advisable to start with demo accounts to practice without risking real capital.