Futures contract

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Futures contract

A legally binding agreement to buy or sell a commodity or financial instrument in a designated future month at a price agreed upon at the initiation of the contract by the buyer and seller. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity. A futures contract differs from an option in that an option gives one of the counterparties a right and the other an obligation to buy or sell, while a futures contract is the represents an obligation to both counterparties, one to deliver and the other to accept delivery. A future is part of a class of securities called derivatives, so named because such securities derive their value from the worth of an underlying investment.

Futures Contract

An agreement to buy or sell an asset at a certain date at a certain price. That is, Investor A may make a contract with Farmer B in which A agrees to buy a certain number of bushels of B's corn at $15 per bushel. This contract must be honored whether the price of corn goes to $1 or $100 per bushel. Futures contracts can help reduce volatility in certain markets, but they contain the risks inherent to all speculative investing. These contracts may be sold on the secondary market, but the person holding the contract at its end must take delivery of the underlying asset. Futures contract are standard instruments; that is, unlike forward contracts, their provisions are standardized. As such, they may be traded on an exchange.

futures contract

An agreement to take (that is, by the buyer) or make (that is, by the seller) delivery of a specific commodity on a particular date. The commodities and contracts are standardized in order that an active resale market will exist. Futures contracts are available for a variety of items including grains, metals, and foreign currencies. See also Section 1256 contracts.

Futures contract.

Futures contracts, when they trade on regulated futures exchanges, obligate you to buy or sell a specified quantity of the underlying product for a specific price on a specific date.

The underlying product could be a commodity, stock index, security, or currency.

Because all the terms of a listed futures contract are structured by the exchange, you can offset your contract and get out of your obligation by buying or selling an opposing contract before the settlement date.

Futures contracts provide some investors, called hedgers, a measure of protection from price volatility on the open market.

For example, wine manufacturers are protected when a bad crop pushes grape prices up on the spot market if they hold a futures contract to buy the grapes at a lower price. Grape growers are also protected if prices drop dramatically -- if, for example, there's a surplus caused by a bumper crop -- provided they have a contract to sell at a higher price.

Unlike hedgers, speculators use futures contracts to seek profits on price changes. For example, speculators can make (or lose) money, no matter what happens to the grapes, depending on what they paid for the futures contract and what they must pay to offset it.

References in periodicals archive ?
All 477 security futures (SSFs) products are electronically traded on the CBOEdirect([R]) match engine and accessible through the CBOEdirect and CME Globex([R]) platforms.
OneChicago is the only US equity finance exchange for trading security futures and the related EFP.
The network is fully QoS scalable with advanced security futures that ensure smooth, secure communications.
NoDivRisk product suite is an innovative equity finance tool, which removes dividend risk from the security futures.
SunGard Futures Systems, an operating unit of SunGard (NYSE:SDS), announced today the completion of functionality designed to process and clear OneChicago's security futures transactions on SunGard's GMI system.
Daniel Carrigan, managing director of OneChicago, said, "It is imperative for OneChicago to have full back-office support at the broker level and a straight-through processing environment to ensure a successful launch for our security futures products.
Island Futures plans to begin offering its services for trading security futures in the second quarter of 2002.
Island Futures has also selected the Options Clearing Corporation (OCC) as its clearinghouse for its security futures products.
onExchange was created to enable new market structures, including security futures and OTC derivatives clearinghouses permitted under the Commodity Futures Modernization Act," said Philip McBride Johnson, an onExchange advisor and former CFTC chairman.

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