Long and short of futures and forward contracts
However, there is every possibility that he is wrong and the spot price of the underlying asset may decline as the contract expiration date approaches. In such cases, he will have to countenance a loss since, by its very nature, a long futures position makes it mandatory for the party to take delivery at the contract price.
The short in such a deal may be acting on the premise that the price of the underlying asset will fall. If he reads the market correctly he can acquire the asset at the terminal spot price, which, by assumption, is lower, and deliver at the initial contract price. However, he, too, may misread the market and have to face a situation where the spot price increases. If so, he will have to face the spectre of a substantial loss. Quite obviously, both parties cannot read the market movement correctly. Thus, either the long or the short is condemned to accept a loss in the case of speculation using futures and forward contracts.
Such contracts may be used as risk mitigation tools as well. The long may be a party who has a short spot position in the underlying asset, that is, he is under a prior obligation to acquire the underlying asset at a future
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