Futures contract

In finance, a futures contract (often just called a future) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The item transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price or delivery 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. Futures contracts are widely used for hedging price risk and for speculative trading in commodities, currencies, and financial instruments. Futures contracts are traded at futures exchanges, which act as a marketplace between buyers and sellers. The party who agrees to buy the underlying asset at the agreed futures price on the delivery date is said to be the long position holder, while the party who agrees to sell (deliver) the underlying asset at the agreed futures price on the delivery date is said to be the short position holder. As both parties risk their counter-party reneging if the price goes against them, the contract may involve both parties lodging a margin of the value of the contract with a mutually trusted third party for security. For example, in gold futures trading, the margin varies between 2% and 20% depending on the volatility of the spot market. A stock future is a cash-settled futures contract on the value of a particular stock market index. Stock futures are one of the high risk trading instruments in the market. Stock market index futures are also used as indicators to determine market sentiment. The first futures contracts were negotiated for agricultural commodities, and...