What is a Futures Contract?

A futures contract is a standardized legal agreement to buy or sell a specified amount of a financial instrument, commodity, or asset at a predetermined price at a specified time in the future. It is a derivative contract that obligates the buyer to purchase the underlying asset and the seller to sell the asset at the agreed-upon price at a future date.

Key Features of Futures Contracts:

• Standardized: Futures contracts are standardized in terms of quantity, quality, delivery time, and location.
• Margin: Traders are required to deposit an initial margin amount to establish a position in a futures contract.
• Leverage: Futures contracts allow traders to control a large value of assets with a relatively small investment.
• Price Fluctuations: Futures contracts are traded on exchanges, and their prices fluctuate based on supply and demand factors.
• Expiration Date: Each futures contract has a specific expiration date, after which the contract must be settled.

Purpose of Futures Contracts:

Futures contracts serve several purposes, including hedging against price fluctuations, speculating on future price movements, and providing liquidity to the markets. They are commonly used by investors, traders, and businesses to manage risk and make bets on the future direction of financial markets.