What is a futures contract?

Futures contracts are financial derivatives that oblige the buyer to purchase some underlying asset (or the seller to sell that asset) at a predetermined future price and date. A futures contract allows an investor to speculate on the direction of a security, commodity, or financial instrument, either long or short, using leverage.

What types of people trade futures contracts?

There are two types of people who trade (buy or sell) futures contracts: hedgers and speculators. These are businesses or individuals that use futures contracts for protection against volatile price movements in the underlying commodity. A good example to illustrate hedging would be a corn farmer and a corn canner.

Is a futures contract a derivative?

The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price. The specified time in the future when delivery and payment occur is known as the delivery date. Because it derives its value from the value of the underlying asset, a futures contract is a derivative .

What is the difference between a future and a forward contract?

While futures and forward contracts are both contracts to deliver an asset on a future date at a prearranged price, they are different in two main respects: Futures are exchange-traded, while forwards are traded over-the-counter. Thus futures are standardized and face an exchange, while forwards are customized and face a non-exchange counterparty.