Futures

Futures are standardized contracts traded on organized exchanges to buy or sell a specific quantity of an asset at a predetermined price on a future date. Each contract specifies the asset, quantity, price, delivery terms, and delivery month. Most futures are settled in cash; some contracts require physical delivery. Contracts are cleared by central counterparties that guarantee performance.

Futures serve hedging, speculation, and price discovery. They allow producers, processors, and users to transfer price risk and provide liquidity by pooling trades on exchanges with standardized terms.

Trading mechanics include margin requirements and daily mark-to-market. Traders post initial margin, and positions are marked to market daily. If losses push equity below the maintenance margin, a margin call occurs. At expiration, contracts are settled; many are closed before delivery and most are cash-settled.

Market participants include farmers, manufacturers, banks, hedge funds, and retail traders. Underlying assets span commodities (oil, wheat), metals (gold), financials (stock indices, interest rates), and currencies.

History and regulation: Modern futures markets formed in the 19th and 20th centuries on organized exchanges such as the CME Group. In many countries, futures trading is regulated to protect market integrity and participants, with clearinghouses providing performance guarantees.

Risks include leverage magnifying losses, counterparty risk mitigated by clearinghouses, basis risk, and liquidity risk for thinly traded contracts. Critics point to market manipulation and the potential for rapid price swings driven by speculative activity.