Definition of Futures Contract

A futures contract is a derivative product that is used to hedge risk. Futures are contracts that can enable one person to buy a certain commodity and at the same time, it enables another person to sell a certain commodity at a particular price and date.


Futures contracts can be used for hedging foreign currency risk, interest rate risks, or commodities. Futures are normally traded on stock exchanges under a much-regulated environment. These are normally available in standardized quantities and with standardized features.


Example of Futures Contract:

An oil manufacturer can sell oil futures in order to lock a price and date he wants to sell on and at the same time, a person willing to buy oil of the same value at the future date will go to the stock exchange and will buy oil futures. At the expiry of the futures contract, both parties will exchange the commodities at an agreed rate.

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