What Are the Futures Contracts?

Futures are an agreement between a buyer and a seller to purchase or sell an asset in the future at a predetermined price and date. Futures contracts are often used to protect against price changes in underlying assets and as a speculative investment.

Futures contract explained

Future contacts have standardized terms, including the contract size, the underlying asset, minimum price fluctuations (tick sizes), and delivery date. 

A margin is one of the primary features of futures contracts. The margin serves as collateral to ensure that the parties fulfil their contractual obligations. Futures contracts can be settled through physical delivery of the underlying asset or a cash settlement. In the latter case, the difference between the contract price and the market price at the expiration is paid out.

Futures can be traded on various assets: commodities (e.g., gold, oil, wheat), financial instruments (e.g., currencies, stock indices, interest rates), and even cryptocurrencies. 

The price of a futures contract is determined by supply and demand, geopolitical events, market sentiment, and interest rates.

What can be traded as futures?

Futures trading allows for a wide range of financial assets, including commodities (oil, natural gas, gold, silver, cotton, wheat); stock indices (the S&P 500, Dow Jones, NASDAQ); currencies (USD, GBP, CAD); interest rates (government and corporate bond rates); cryptocurrencies (Bitcoin, Ethereum).

What is the difference between the futures and the spot?

There are two primary types of financial contracts: futures and spots. Although similar, they differ in several significant aspects. Learn the main differences between the two: 

Dates

Spot: The current market prices are used for transactions, which are typically settled within a couple of days.

Futures: Specific prices and dates in the future are used for transactions; the settlements take place on the expiration date of the contract.

Prices

Spot: Asset prices are determined by the current supply and demand.

Futures: Prices are predetermined in the contract and traded based on those prices.

Trading

Spot: Involves buying and selling of financial assets that are currently available on the market.

Futures trading: Involves the buying and selling of contracts that represent the future delivery of financial assets.

Risks

Spot: Associated with the risks of current price fluctuations.

Futures: associated with the risks of future price fluctuations.

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