Futures
A future is an undertaking to buy or sell a standard quantity of a financial asset or commodity at a future date at a fixed price. Futures resemble forward contracts in that they involve buying or selling an item for receipt or delivery in the future, but are different from them in that they are standardised contracts. Every futures contract has standard terms that dictates the minimum quantity and quality that can be bought or sold, the smallest amount by which the price may change, delivery procedures, contract months and so on. They must be traded on a recognized exchange. Unlike forward contracts, delivery of a futures contract is rare. As the delivery date draws near most investors close out their positions by making an equal and opposite trade. The futures markets bring together hedgers who wish to protect themselves against the rise or fall of prices and speculators who are trying to benefit from such movements. A clearing house acts as the counter party in every transaction to protect against the risk of default so buyers and sellers do not have to deal directly with each other. Futures markets developed as a method for establishing forward purchase prices and managing price instability caused by seasonal factors in agricultural markets. Contracts in financial instruments such as interest rate and stock index and currency futures attract the greatest volume nowadays.
See also: Derivatives, Hedging, Margin, Option, OTC, Tick, Premium, Spread, CBOT, NYMEX