Futures exposure refers to the level of financial risk an investor or trader takes on by participating in the futures market. This exposure arises when an individual or institution enters into futures contracts, which are legal agreements to buy or sell an asset at a predetermined price at a specified time in the future. The exposure can vary based on the quantity of contracts held and the underlying assets.
The concept of futures exposure is crucial as it directly affects the potential gains or losses an investor can realize. When you hold a long position — meaning you have agreed to buy in the future at a set price — your exposure relates to the risk that the market price could fall below the agreed price, resulting in a loss. Conversely, in a short position where you have agreed to sell, your exposure is to the risk that the market price could rise above the agreed price.
Managing futures exposure involves strategies to mitigate risks such as altering the size of positions or using stop-loss orders. Traders and investors closely monitor their exposure to maintain it within their risk tolerance levels, often using various hedging techniques to protect against adverse price movements in the market.
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