Futures Contract

A futures contract is a standardized, legally binding agreement traded on an exchange to buy or sell a specific quantity of an underlying asset at a predetermined price on a set future date. Unlike forward contracts, futures are standardized in terms of quantity, quality, delivery date, and settlement procedures. They are subject to daily mark-to-market settlement, where gains and losses are credited or debited to margin accounts each day. This process, combined with initial and maintenance margin requirements, virtually eliminates counterparty risk. Futures exist for commodities (oil, gold, wheat), financial instruments (stock indices, bonds, currencies), and newer products (Bitcoin, volatility). They serve three primary functions: hedging, speculation, and price discovery. The futures market is crucial for global price setting in many commodity markets.