Futures contract
Also known as: futures · future
In finance, a futures contract is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other.
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primary economic purpose of futures contracts
Futures contracts are fundamentally used as a risk management tool to lock in prices and protect against future price volatility of an underlying asset.
daily settlement process for futures contracts
Futures contracts are marked-to-market daily, meaning gains and losses are settled at the end of each trading day to prevent the accumulation of debt.
market activity driving liquidity in futures markets
Speculators take on the price risk that hedgers seek to avoid, providing the necessary liquidity for futures markets to function efficiently.
intermediary that guarantees performance of futures contracts
The clearing house acts as the buyer to every seller and the seller to every buyer, mitigating counterparty risk and ensuring contract fulfillment.
collateral requirement for maintaining futures positions
Because futures are leveraged, traders must maintain a margin account with sufficient collateral to cover potential losses, which is a critical operational aspect of the contract.
pioneering exchange for standardized futures contracts
Established in 1848, this exchange formalized the trading of grain futures, creating the standardized contract model used in modern global financial markets.
standardized version of forward contracts
Futures contracts are exchange-traded instruments that rely on the forward curve to determine their daily settlement prices.
market condition where spot price exceeds future price
This state occurs when the current demand for an asset is significantly higher than the expected future supply, causing the futures price to trade at a discount.
market condition where future price exceeds spot price
Contango is a specific market state for futures contracts where the price for future delivery is higher than the current spot price, often reflecting storage costs.
extreme price deviation often facilitated by futures leverage
The use of leverage in futures contracts can exacerbate speculative bubbles by allowing traders to control large positions with minimal capital.
Financial instrument used for speculation
The mania was largely driven by the trading of 'windhandel' (wind trade), which were essentially futures contracts for bulbs still in the ground, allowing traders to profit without owning the physical goods.
driver of volatility in futures markets
When market participants follow the actions of others, it can lead to rapid, non-fundamental price swings in futures contracts, increasing market instability.
study of psychological biases in futures trading
This field examines how human irrationality and herd behavior influence the pricing and volatility of futures contracts beyond fundamental economic data.
theoretical framework for futures pricing
The hypothesis suggests that futures prices incorporate all available information, making it difficult for traders to consistently outperform the market.