Futures and Options (4)

Futures Contract (1)

Futures contracts are like forward contracts in that they represent an agreement between a buyer and a seller to exchange a specified amount of cash for an asset at a future date.

But unlike forward contracts, futures contracts are traded on an exchange and the agreements are standardised with contract specifications stating exactly the amount and quality of goods to be bought or sold at a fixed price at a fixed future date.

The contracts are not privately arranged but made known publicly so that anyone can participate in the trading.

Each futures contract has an expiry date, which is the last day of trading in the particular contract month.

On that day, any futures position that is open (i.e. has not been closed out - meaning offset - by an opposite transaction) will be called upon for physical delivery or cash settlement.

After the expiry date, the futures contract ceases to exist.