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Finance Dictionary and Glossary of Investment Terms
A standardized, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date. Unlike options, futures convey an obligation to buy. The risk to the holder is unlimited, and because the payoff pattern is symmetrical, the risk to the seller is unlimited as well. Dollars lost and gained by each party on a futures contract are equal and opposite. In other words, futures trading is a zero-sum game. Futures contracts are forward contracts, meaning they represent a pledge to make a certain transaction at a future date. The exchange of assets occurs on the date specified in the contract. Futures are distinguished from generic forward contracts in that they contain standardized terms, trade on a formal exchange, are regulated by overseeing agencies, and are guaranteed by clearinghouses. Also, in order to insure that payment will occur, futures have a margin requirement that must be settled daily. Finally, by making an offsetting trade, taking delivery of goods, or arranging for an exchange of goods, futures contracts can be closed. Hedgers often trade futures for the purpose of keeping price risk in check. also called futures contract.
A financial contract that encompasses the sale of financial instruments or physical commodities for future delivery, usually on a commodity exchange. Futures contracts try to "bet" what the value of an index or commodity will be at some date in the future.
Futures are contracts to make or accept delivery of a given commodity on a given date at a prearranged price. Futures are traded on all sorts of things, including corn, pork bellies, and Treasury securities. Hardly anyone actually delivers (or accepts) all the bacon implied by a futures contract on pork bellies, though. Investors simply settle up with money and that''s that. Basically, futures are a legal way to bet on the direction of a commodity''s price, or (in the case of Treasury securities) on the direction of interest rates. Using leverage, you can make a killing in futures; margin rules are much more relaxed than for stocks, and so you can control a vast quantity of corn, for instance, with a very small up-front investment. Of course, this helps make futures extraordinarily risky. Although they are used by large financial institutions and agribusinesses to hedge various risks, for the average investor, they are little more than gambling, with poor odds at that.
A term used to designate all contracts covering the sale of financial instruments or physical commodities for future delivery on a commodity exchange.