Futures

AAA

DEFINITION of 'Futures'

A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.

Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures.

INVESTOPEDIA EXPLAINS 'Futures'

The primary difference between options and futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his/her contract.

In real life, the actual delivery rate of the underlying goods specified in futures contracts is very low. This is a result of the fact that the hedging or speculating benefits of the contracts can be had largely without actually holding the contract until expiry and delivering the good(s). For example, if you were long in a futures contract, you could go short in the same type of contract to offset your position. This serves to exit your position, much like selling a stock in the equity markets would close a trade.

VIDEO

RELATED TERMS
  1. Domestic Box Office Receipt (DBOR) ...

    Futures contracts based on movie receipts at the box-office. ...
  2. Dojima Rice Exchange

    The world's first commodity futures exchange. Established in ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with ...
  4. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  5. Futures Market

    An auction market in which participants buy and sell commodity/future ...
  6. Leverage

    1. The use of various financial instruments or borrowed capital, ...
Related Articles
  1. Introduction To Single Stock Futures
    Options & Futures

    Introduction To Single Stock Futures

  2. Getting Started In Foreign Exchange ...
    Forex Education

    Getting Started In Foreign Exchange ...

  3. Interpreting Volume For The Futures ...
    Options & Futures

    Interpreting Volume For The Futures ...

  4. Money Management Matters In Futures ...
    Options & Futures

    Money Management Matters In Futures ...

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center