A futures contract is a standardized agreement between two parties to buy or sell a specific asset or commodity at a predetermined price and date in the future. The asset or commodity being traded can be anything from agricultural products, precious metals, energy products, or financial instruments.
The price and date for delivery of the underlying asset are predetermined when the futures contract is created. The buyer agrees to purchase the asset on the specified future date at the agreed-upon price, while the seller agrees to deliver the asset on that same date at the agreed-upon price.
Futures contracts are traded on futures exchanges, which provide a marketplace for buyers and sellers to trade these contracts. The exchanges also provide standardized contract terms, such as the size of the contract, delivery date, and quality of the underlying asset.
Futures contracts are commonly used by individuals and businesses to manage risk associated with price volatility. For example, a farmer might use a futures contract to sell their crops at a future date, thereby protecting themselves from potential price declines. Similarly, a business might use futures contracts to lock in the price of commodities or raw materials they need to produce their goods.
Futures contracts can be highly leveraged, meaning that a small amount of capital can control a large amount of the underlying asset. This makes futures trading a high-risk, high-reward investment strategy that requires knowledge and expertise to navigate successfully.