Futures Contract Definition
A futures contract is a standardized, legally binding agreement to buy or sell a specific asset at a predetermined price at a specified time in the future. Futures contracts are traded on exchanges and are used by speculators to bet on the direction of the market, or by hedgers to protect against price fluctuations in the underlying asset.
The asset that is being traded in a futures contract can be anything from corn to crude oil, gold to foreign currency. The price is set at the time of the contract, but delivery and payment occur at a later date. Because futures contracts are standardized, they can be easily traded on an exchange.
Futures contracts are used mostly by speculators, who hope to profit from changes in the price of the underlying asset. These investors typically don’t actually want to take possession of the asset; they just want to make money from price movements. Hedgers use futures contracts to protect against price fluctuations in an asset they plan to buy or sell in the future. For example, if a company knows it will need to buy corn for production six months from now, it can hedge against rising prices by buying a corn futures contract today.
