futures contract

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futures contract

A trader reviews a futures contract on a computer screen.

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.
futures contract

A trader reviews a futures contract on a computer screen.

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