Futures contract definition
Futures contract
A futures contract is a standardized legal agreement to buy or sell a product at a set price at a specified time in the future. The contracts are standardized for both quantity and quality and are traded through exchanges.
Futures contracts explained
The asset exchanged in a futures contract is usually a commodity or a financial instrument. The predetermined price the parties agree to exchange the asset for is called the forward price. The time is called the delivery date, and this is when delivery and payment occur.
Futures enable you to speculate on their underlying asset without buying or selling them directly. Because of this, they are defined as derivatives.
There are two parties involved; the buyer of a futures contract takes on the obligation to buy the underlying asset when the futures contract expires. The seller takes on the responsibility to deliver the underlying asset on the expiration date. You can also settle a future for cash if you don’t want to take delivery of the underlying asset.