INSIGHTSFutures contracts are legally binding agreements to purchase or sell an asset at a predetermined price at a specified date in the future. They are traded on futures exchanges and cover a wide range of assets including commodities, indices, and currencies. The standardization of contracts means that the quantity and quality of the underlying asset are predefined, making them easily tradable among market participants.
For example, a trader might enter into a futures contract to buy crude oil at $70 per barrel to hedge against price fluctuations. If the price rises to $80 by the contract's expiration, the trader profits by securing a lower purchase price. Conversely, if the price falls, the trader incurs a loss. Futures contracts can be settled in cash or through physical delivery, based on the terms specified in the contract. Related concepts include margin requirements, which are necessary to control the potential risks associated with futures trading.