futures contract
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.
Related Terms on BusinessDictionary
intercommodity spread
intracommodity spread
Margrabe option
derivative security
Bermuda option
spot month
TED Spread
cross-hedging
first notice day
investment leverage
bear spread
portfolio insurance
contract grade
underlying
last trading day
macro hedge
cash and carry
stock index futures
physical delivery
against actuals
intracommodity spread
Margrabe option
derivative security
Bermuda option
spot month
TED Spread
cross-hedging
first notice day
investment leverage
bear spread
portfolio insurance
contract grade
underlying
last trading day
macro hedge
cash and carry
stock index futures
physical delivery
against actuals
Popular 'Futures' Terms
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