Futures in trading are standardized derivative contracts that obligate the buyer and seller to exchange a specific asset at a predetermined price on a set future date. These contracts are legally binding agreements to buy or sell commodities, financial instruments, or other assets at a fixed price before or on the contract's expiration date
. Key features of futures contracts include:
- Standardization: Futures contracts specify the exact quantity, quality, and delivery date of the underlying asset, ensuring liquidity and uniformity in trading
- Underlying assets: These can include commodities like oil, gold, wheat, stock indexes, interest rates, currencies, and cryptocurrencies
- Obligation: Both parties must fulfill the contract terms, either by physical delivery of the asset or by cash settlement, though most contracts are closed out before delivery occurs
- Trading: Futures are traded on regulated exchanges, which act as marketplaces between buyers (long positions) and sellers (short positions)
- Margin and risk: Because futures involve future obligations, traders post margin (a security deposit) to cover potential losses, and the contracts carry significant risk
Futures are used by different market participants:
- Hedgers: Producers or consumers of commodities use futures to lock in prices and reduce risk from price fluctuations
- Speculators: Traders who seek to profit from price changes by taking long or short positions without intending to take delivery of the asset
In essence, futures trading allows participants to speculate on or hedge against future price movements of various assets, with the price agreed upon today for a transaction that will occur later
