A futures contract is a standardized legal agreement to buy or sell an asset, such as commodities, currencies, or financial instruments, at a predetermined price on a specific future date. These contracts are traded on regulated exchanges and are primarily used for hedging risks or speculating on price movements.
Key Features:
- Standardization: Futures contracts specify the quantity, quality, and delivery date of the underlying asset, making them uniform and easily tradable.
- Leverage: Investors can control large positions with relatively small initial capital through margin requirements, increasing both potential gains and risks.
- Obligation: Both the buyer and the seller are obligated to fulfill the contract terms unless they offset their positions before the expiration date.
Uses:
- Hedging: Companies or investors use futures to protect against adverse price movements. For example, an airline might use futures to lock in fuel prices.
- Speculation: Traders aim to profit from price fluctuations of the underlying asset without intending to take delivery of the asset.