What is a futures contract?

A futures contract is a standardized legal agreement to buy or sell an asset at a predetermined price on a specified future date. These contracts are traded on regulated exchanges and commonly involve commodities, currencies, or financial instruments. Futures are widely used for hedging and speculation. For example, farmers may sell futures contracts to lock in crop prices, protecting against price drops, while traders speculate on price movements to earn profits. Unlike options, futures obligate both parties to fulfill the contract at expiration unless it is closed earlier. They require margin deposits and are marked to market daily, meaning gains and losses are settled each day. Futures markets provide liquidity, price transparency, and risk management tools for businesses, investors, and institutions worldwide.