Futures Contract
A standardized agreement to buy or sell an asset at a fixed price on a specified future date.
What is Futures Contract?
A futures contract is a legally binding agreement to buy or sell a specific quantity of an asset at a predetermined price on a set future date. Unlike forward contracts, futures are standardized and traded on regulated exchanges such as the Chicago Mercantile Exchange (CME), which requires both parties to post margin as collateral. Futures contracts are marked to market daily — gains and losses are settled in cash each day. They cover a wide range of assets including commodities (crude oil, corn, gold), financial instruments (Treasury bonds, equity indexes), and currencies. Most futures contracts are closed out before delivery; only a small fraction result in actual physical delivery.
Example
A wheat farmer sells five December wheat futures contracts (each covering 5,000 bushels) at $6.00 per bushel to lock in revenue for the upcoming harvest. By harvest time, spot wheat falls to $5.50. The farmer collects $6.00 from the futures buyer, effectively receiving $0.50 more than the market price and protecting farm income.