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What is a Futures Contract?

what is a futures contract a futures

contract is a commitment to make or take

delivery of a specific quantity of a

given asset or a cash difference at a

specific date in the future at a price

agreed today they can be used to protect

producers processes and manufacturers

from risk of price change of an asset

over time all terms of the contract are

standardized other than the price this

characteristic of futures contracts

allows buyer or seller to easily

transfer contract ownership to another

party without the burden of unique or

tailored terms the only contract

variable is price price is discovered by

bidding and offering in an exchanges

trading system when a bid and offer

match a trade occurs futures contracts

are products designed by and traded on

regulated exchanges therefore the

exchange is responsible for setting a

specifications of each contract every

exchange-traded futures contract is

centrally cleared by a process called

innovation this means that when a

futures contract is bought or sold the

Clearing House takes opposite side of

the trade with the trains broker

effectively becoming the BI of every

seller and the seller for every buyer

this manages the credit risk associated

with the default of the underlying

counterparty to the trade the benefits

of trading futures contracts include

additional surety or unsettlement the

ability to set prices in advance and the

ability to adjust volume in the open

market there are two types of futures

contracts settlements physical

settlement and cash settlement physical

cinnamon is when upon settlement the

buyer pays cash and in return the seller

provides a physical security or

commodity cash settlement is when upon

settlement a payment of cash is

exchanged referenced to a benchmark

market price all inside X futures a cash

settled

so in summary incidence futures

contracts are exchangeable through the

life of the contract have standardized

terms are traded on an exchange

essentially cleared to manage

counterparty risk and all ends index

futures contracts are cash settled

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