Forward and futures contracts involve the agreement between two parties to buy and sell an asset at a specified price by a certain date. A forward contract is a private and customizable agreement that settles at the end of the agreement and is traded over the counter (OTC).
What are futures & how do they work?
Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. Here, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.
How does a futures contract get its name?
A futures contract gets its name from the fact that the buyer and seller of the contract are agreeing to a price today for some asset or security that is to be delivered in the future. Are Futures and Forwards the Same Thing?
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 .
