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A standardised contract setting terms for a transaction or settlement involving a specified asset or reference at a later date.
Save conceptA futures contract sets terms today for a transaction or settlement involving a specified reference at a later date. References can include commodities, currencies or market indexes. Standardised exchange rules specify the contract size, timing and how obligations are fulfilled. A futures contract is a because its value depends on something else.
Participants enter opposing contractual positions. Depending on the contract, the obligation can end through delivery or a cash payment calculated under its rules. Many positions are closed before the final date. Changes in the market price affect the position’s value while it is open. The contract count tells how much trading occurred, but different contract sizes mean equal counts need not represent equal financial exposure.
Consider a hypothetical producer worried that a commodity’s selling price will fall before its output is ready. A futures position can offset part of that exposure: a loss on the physical sale may be accompanied by a gain on the contract. The match is imperfect if the product, quantity or delivery date differs. Another participant may use a futures position to take a view on a price movement without producing the commodity.
A futures contract is different from an option, which gives its buyer a right under stated conditions rather than the same contractual obligation. Futures also differ from owning shares or physical goods directly. They can reduce a particular risk while introducing other risks and payment obligations; they are not a guarantee against losses.
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