Concept of Futures Contract

A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price.

Futures contracts are special types of forwarding contracts in the sense that the former are standardized exchange-traded contracts.

Unlike forward contracts, the counterparty to a futures contract is the clearing corporation on the appropriate exchange.

Futures often are settled in cash or cash equivalents rather than requiring physical delivery of the underlying asset.

Parties to a Futures contract may buy or write options on futures.

Future contracts, while similar to forwarding contracts, have certain features that make them more useful for risk management.

These include being able to extinguish contract obligations through offsetting rather than actual delivery of the commodity.

In fact, very few futures contracts are ever delivered upon.

Future contracts are traded on organized exchanges in a variety of commodities (including grains, livestock, bonds, and currencies).

They are traded by the open outcry, where traders and brokers shout bids and offer from a trading pit at designated times and places.

This allows producers, users, and processors to establish prices before commodities are traded. Futures prices are forecasts that can and do change for various reasons, such as crop or weather reports.

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