futurescontract

A futures contract is a standardized legal agreement traded on a futures exchange to buy or sell a specific asset at a predetermined price on a specified future date. The asset can be a physical commodity (such as grain or oil), a financial instrument (such as government bonds or a stock index), or a currency. Each contract specifies the quantity, quality or grade, delivery location, and delivery month, and is regulated by the exchange through a clearinghouse.

Futures are standardized and traded on organized markets; counterparty risk is reduced by central clearing. Participants must post margin: an initial margin to enter the contract and maintenance margin to keep it open. Profits and losses are settled daily through mark-to-market, meaning gains and losses are credited or debited to traders’ accounts each trading day.

Two broad purposes drive futures markets: hedging and speculation. Hedgers, such as producers and users of a commodity or financial instrument, use futures to lock in prices and manage risk. Speculators aim to profit from price fluctuations, while arbitrageurs seek to exploit price differentials across related markets.

Most futures do not result in physical delivery; many are cash-settled or offset by a closing trade before the delivery date, and only a small fraction lead to actual delivery. Contract terms include price quotes, tick size, and delivery month, with daily price limits applying in some markets.

Origins of futures trading trace to 19th-century commodity exchanges, but today futures markets are global, providing price discovery, liquidity, and a framework for risk management and investment across diverse asset classes.