Futures Contracts
What It Is
Futures are standardized contracts to buy or sell an asset at a predetermined price on a future date.
Why It Matters
They allow investors to hedge risk or speculate on price movements in commodities, indexes, currencies, and more.
How It Works
- Traded on regulated exchanges
- Require margin deposits
- Marked to market daily
- Obligatory unless closed before expiration
Key Components
- Contract size
- Expiration month
- Initial and maintenance margin
- Daily settlement
Example
An investor may buy S&P 500 futures to gain broad market exposure with leverage.
Key Takeaways
- Futures provide leverage and liquidity.
- They carry obligation, unlike options.
- Widely used for hedging and speculation.