As companion series of Blockchain 101, issued by Huobi Group, Contract Trading 101 is the beginners guide to understand contract trading-- a practical tool for hedge, arbitrage and speculation.
Contract trading is the act of the two trading parties to buy or sell contracts at the exchange, in which it has clarified buyers would buy specified quantities of the commodities at a specific price, a particular time and a fixed place in the future. Developed from Forward Contracts, contract trading is a new type of trading mode to buy and sell standardized contracts at exchanges.
The difference between contract trading and spot transaction is that spot transaction literally trades commodities, while contract trading is a standardized contract trading regarding certain commodities as underlying assets, like special goods (such as cotton, soybeans, oil) or financial assets (such as stocks, bonds, etc.).
There have been various digital assets derivatives using cryptocurrencies as underlying assets, since Bitcoin issued. The ultimate goal of contract trading is to find the fair price instead of transferring commodities’ ownership. By purchasing and selling contracts, we can avoid the uncertain risks caused by the fluctuation of spot prices. In addition, we can also take profits from the contracts via arbitrage or speculation.