Futures

Futures

A term used to designate all contracts covering the sale of financial instruments or physical commodities for future delivery on a commodity exchange.

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Futures

An agreement to buy and sell an asset at a certain date at a certain price. For example, 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 priceof 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.

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Futures

What Does Futures Mean?

Futures involve a financial contract that requires the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a specific price on a predetermined date in the future. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, and others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets. Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). However, anybody could speculate on the price movement of corn by going long or short using futures.

Investopedia explains Futures

The primary difference between options and futures is that options give the holder the right, not the obligation, to buy or sell the underlying asset until expiration, whereas the holder of a futures contract is obligated to fulfill the terms of the contract. In reality, most futures contract holders do not hold the contract to expiration. In addition, if an investor were long in a futures contract, that investor could go short the same type of contract to offset his or her position. This serves to exit the position, much like selling a stock in the equity markets would close a trade.

Related Terms:
• Commodity
• Hedge
• Leverage
• Option
• Short (or Short Position)