Futures are financial contracts that obligate the buyer and seller of the contract to complete a trade for a [financial instrument] at a set price and date in the future. The price and date are written into the contract and the transaction must occur regardless of the current price of the underlying financial instrument at that specific date in time.
Futures contracts are available to traders on several financial instruments such as commodities, currencies, bonds, and stock indices, and in essence, allow traders to lock in the price of a financial instrument at a specific date in time.
Futures are often used by producers of raw materials to lock in future selling prices and reduce the risks related to unfavorable moves in the price of an instrument, this is commonly referred to as [hedging].
[options]are a similar type of contract, giving the holder the right(option) to buy or sell the underlying instrument at a specific price on a specific date. This differs from a futures contract as the holder of a futures contract is obliged to fulfil the contract at the expiration date.
Key takeaways:
- Futures contracts allow traders to lock in the price of a financial instrument at a specific date in the future
- Futures contracts are often used by producers of raw materials to lock in their future selling price and hedge against unfavorable price movements
- Futures contracts are available on a large range of financial instruments
- Futures contracts differ from options contracts in that the holder is obligated to buy or sell at the specified price and date rather than have the option to buy or sell