A future contract is a legal agreement between two parties to buy or sell a specific asset at a predetermined price and date in the future. This type of contract is commonly used in the financial industry to hedge against future price fluctuations.
The asset being traded can be anything from commodities such as oil, gold, and wheat to financial instruments such as stocks, bonds, and currencies. The price and date of the future contract are agreed upon by both parties at the time of the contract`s creation.
Future contracts are mainly used by investors and traders to manage their risk exposure and to speculate on price movements. For instance, if an investor believes that the price of gold will increase in the next few months, they can buy a future contract to lock in the current price and avoid the risk of price fluctuations. The contract will allow them to buy gold at the agreed-upon price regardless of the market price at the time of maturity.
Similarly, companies that rely on certain commodities or currencies can use future contracts to mitigate their risk exposure to price fluctuations. For example, airlines can use future contracts to buy oil at a predetermined price and avoid the risk of price volatility in the oil market.
It`s important to note that future contracts are standardized and traded on regulated exchanges such as the Chicago Mercantile Exchange (CME) and the New York Mercantile Exchange (NYMEX). This means that the terms of the contract, such as the size, expiration date, and price, are predetermined and non-negotiable.
In summary, future contracts are a useful financial instrument for investors and traders to manage their risk exposure and speculate on price movements. They are standardized and traded on regulated exchanges, and their terms are predetermined and non-negotiable.
