Futures Contract

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Description of Futures Contract. Explanation.


Definition Futures Contract. Description.

A Futures Contract is a standardized legally binding agreement, traded on a futures exchange, which requires the delivery of a commodity, currency, or financial instrument at a specified date in the future, at a set price specified on the last trading date. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. The only variable is price.

A futures contract gives the holder the right and the obligation to buy or sell. Contrast this with an options contract, which gives the buyer the right, but not the obligation, and the writer (seller) the obligation, but not the right. In other words, an option buyer can choose not to exercise when it would be uneconomical for him. The holder of a futures contract and the writer of an option, do not have a choice. To exit the commitment, the holder of a futures position has to sell his long position or buy back his short position, effectively closing the position.

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Compare with: American-Style Option  |  European-Style Option  |  Call Option  |  Put Option  |  Asian Option  |  Hedge

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