Commodity Futures
Standardized contracts to buy or sell a specific quantity of a commodity at a set price on a future date.
What is Commodity Futures?
Commodity futures are legally binding agreements to buy or sell a specified amount of a raw material — such as crude oil, gold, wheat, copper, or natural gas — at a predetermined price at a specified date in the future. These contracts are traded on exchanges such as the NYMEX (CME Group) and ICE. Producers use futures to lock in prices and reduce revenue uncertainty (hedging); speculators use them to profit from anticipated price changes. Because futures are leveraged instruments, they can amplify both gains and losses. Retail investors most commonly access commodities through futures-based ETFs and ETNs rather than directly through futures contracts.
Example
An airline anticipating fuel costs might buy crude oil futures contracts to lock in a purchase price of $80 per barrel six months ahead. If oil rises to $100 by delivery, the airline saves $20 per barrel through the hedge. However, if oil falls to $70, the airline still pays the $80 contract price — the hedge limits upside but prevents downside surprises.