Futures contract

A futures contract obliges both parties, the buyer (long) and the seller (short), to trade a specified quantity of an asset, such as a commodity, currency, bond or stock index, at an agreed price on a set date. Unlike an option, neither side has a choice. Futures trade on exchanges, and a clearing house stands between buyer and seller to guarantee the trade. Each side puts up initial margin, a fraction of the contract's value, and gains and losses are settled daily through variation margin as the price moves. Many contracts are settled in cash, and most traders close their positions before expiry rather than take delivery.

Futures were developed so that producers and users of commodities could lock in prices, and they remain important for hedging: a farmer can fix a sale price for a coming harvest, and a fund manager can adjust exposure to a whole market quickly. They are also used heavily for speculation. Because the margin is small relative to the contract's value, futures are highly leveraged: losses can be large and can exceed the initial margin, and if the price moves against you, you must deposit more money or have the position closed. Funds holding futures must also roll them into later contracts, which can add costs.