A Futures Contract is a standardized agreement to buy or sell an asset at a predetermined price on a specified date in the future. These contracts are traded on regulated exchanges, allowing traders to speculate on price movements or hedge existing positions without holding the underlying asset.
How they work
Futures contracts specify four key elements: the underlying asset (commodity, financial instrument, or index), the contract size (quantity), the expiration date, and the agreed price. The exchange guarantees contract performance, eliminating counterparty risk.
Uses for traders
Traders use futures for speculation (profiting from price movements), hedging (protecting against adverse price changes), and to benefit from price discovery (futures markets often move ahead of spot prices). Leverage allows traders to control large positions with minimal capital.
Key risks
Leverage magnifies both gains and losses. Rapid price swings can result in significant losses. Traders must maintain sufficient margin or face forced liquidation. Unlike options, futures are obligations—positions cannot be abandoned or reduced by paying a fee.
Comparison with similar instruments
| Instrument | Type | Market | Obligation |
|---|---|---|---|
| Futures | Standardized | Exchange-traded | Obligation |
| Options | Optional right | Exchange-traded | Optional |
| Spot Contracts | Immediate delivery | Cash market | Obligation |
