Definition

Noun: A futures contract is a standardized, legally binding agreement to buy or sell a specific quantity of a particular asset (such as a commodity, currency, or financial instrument) at a predetermined price on a specified future date. These contracts are traded on a futures exchange.

Usage

A futures contract is used primarily for two purposes: hedging against price risks and speculating on future price movements. The contract itself is an asset that can be bought and sold before its settlement date.

Examples

• The farmer used a futures contract to lock in a price for his wheat harvest six months in advance.
• Many investors trade futures contracts on stock indices like the S&P 500.
• The price of a crude oil futures contract fluctuates daily based on market expectations.

Advanced Usage

• Marked to Market: The value of a futures contract is recalculated ("marked to market") at the end of each trading day based on the settlement price. Gains or losses are settled daily.
• Settlement: Most futures contracts are closed out with an offsetting trade before the delivery date. Physical delivery of the actual commodity is rare.
• Leverage: Trading futures involves high leverage, meaning a trader controls a large contract value with a relatively small amount of capital (the initial margin), which amplifies both potential gains and losses.

Variants and Related Words

• Future (n.): Often used as a shortened, informal term for a futures contract (e.g., "He trades oil futures").
• Futures (n., plural): Refers to the market or the class of these contracts as a whole (e.g., "the commodities futures market").
• Forward Contract: A similar but non-standardized agreement traded over-the-counter (OTC), not on an exchange.

Synonyms

• Derivative Contract (a broader category that includes futures)
• Commodity Contract (when the underlying asset is a physical commodity)

Related Terms and Concepts

• Underlying Asset: The specific commodity or instrument (e.g., gold, Treasury bonds) that the futures contract is based upon.
• Expiration Date: The stipulated future date when the contract settles.
• Margin: The collateral required to open and maintain a futures position.

Noun

1. an agreement to buy or sell a specific amount of a commodity or financial instrument at a particular price on a stipulated future date; the contract can be sold before the settlement date