What is a Futures Contract?
A futures contract is a standardized agreement between two parties to buy or sell a specified asset at a predetermined price on a specified future date. Futures contracts are commonly used by investors and traders for speculation, hedging, and risk management purposes. They are available for a wide range of underlying assets, including commodities (such as oil, gold, and wheat), financial instruments (such as stock indices and interest rates), and currencies.
Key features of futures contracts include:
- Futures contracts have standardized terms, including the quantity and quality of the underlying asset, the price increments (tick size), and the expiration date.
- Futures contracts are traded on organized exchanges, providing liquidity and transparency.
Difference between Forward Contract and Futures Contract
In finance, forward and futures contracts are essential tools for managing risk and speculating on future price movements. While both involve agreements to buy or sell assets at a predetermined price on a future date, they have significant differences. Forward contracts are privately negotiated between parties and offer customization options, while Futures contracts are traded on exchanges with standardized terms.