FFA Farm Business Management Contest Practice Exam

Paying the premium buys the right, not the obligation, to enter into a futures contract at a set price. This premium is the price of an option on the futures and reflects the potential value if the futures move in a favorable direction before the option expires. It’s separate from a broker’s commission (the fee to execute the trade), the margin (the collateral to hold a futures position), and a quote (the current price of the futures itself). In short, the premium is the cost of purchasing the option that grants the right to trade the futures.