FUTURES
Back to GlossaryDefinition
Standardized contracts obligating the buyer to purchase and the seller to deliver an asset at a future date and price.
Summary
Futures contracts are legally binding agreements to buy or sell a specific asset (like commodities, stocks, or currencies) at a predetermined price on a specific future date. Think of them as 'reserving' something today at today's agreed price, but paying for and receiving it later. These contracts are standardized and traded on exchanges, meaning the terms (quantity, quality, delivery date) are the same for all participants. Both parties are obligated to fulfill the contract - unlike options where you have a choice.
Usage Context
Essential when studying risk management, derivative markets, portfolio hedging strategies, commodity trading, and financial market mechanisms. Critical for understanding how businesses and investors manage price uncertainty and market volatility.
Common Confusions
- Thinking futures and options are the same thing
- Believing you must physically deliver or receive the asset
- Confusing futures with forwards (futures are standardized and exchange-traded)
- Not understanding that both parties have obligations, not just rights
- Thinking futures are only for commodities when they exist for financial instruments too
