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What is a Futures Contract?

By Jim Antonilli
Filed under: Futures Trading         Words in this Post: 246



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>- A Forward Contract is a contract between a buyer and seller in which the seller agrees to deliver a specific commodity to the buyer at some time in the future. The terms of this contract—price, quantity, quality, time, and location—were negotiated between the buyer and seller.

>- A Futures Contract is a legally binding agreement, made on the trading floor of a Futures exchange, to buy or sell a commodity or financial instrument some time in the future.

>- Futures Contracts are standardized according to quality, quantity, and delivery time and location for each commodity. The only variable is price, which is discovered on an exchange trading floor.

>- Futures Contracts are advantageous over forward contracts because they are standardized so the contract is no longer between two individuals as in a forward contract—but between individuals and the exchange which guarantees all transactions.

> Futures Contracts are backed by a margining system that requires both the buyer and seller of the futures contract to deposit funds with tie exchange or an exchange representative to guarantee performance of the contract.

>- Because futures contracts are standardized, they are interchangeable, allowing positions to be entered and exited on the exchange floor without ever having to make or accept delivery of the underlying commodity.

>- Futures contracts represent more than just Corn and Soybeans; today we have futures contracts on traditional commodities ranging from Corn and Crude Oil, to contracts on Treasury Bonds, Foreign Currencies, Eurodollar Deposits, as well as single stock futures contracts.

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Author: Jim Antonilli

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