A standardized,
transferable, exchange-traded contract that
requires delivery of a
commodity,
bond,
currency, or
stock index, at a specified
price, on a specified
future date. Unlike
options, futures convey an
obligation to buy. The
risk to the
holder is
unlimited, and because the
payoff pattern is symmetrical, the risk to the
seller is unlimited as well.
Dollars lost and gained by each
party on a futures contract are equal and opposite. In other words,
futures trading is a
zero-sum game.
Futures contracts are
forward contracts, meaning they represent a
pledge to
make a certain
transaction at a future date.
The
exchange of assets occurs on the date specified in the contract. Futures are distinguished from generic forward
contracts in that they contain standardized
terms,
trade on a formal
exchange, are regulated by overseeing
agencies, and are guaranteed by
clearinghouses. Also, in
order to insure that
payment will occur, futures have a
margin requirement that must be settled daily. Finally, by
making an offsetting trade, taking delivery of
goods, or arranging for an exchange of goods, futures contracts can be
closed.
Hedgers often trade futures for the purpose of keeping
price risk in check.
also called futures contract.