Editing Futures contract (section)

{{Short description|Financial contract}}
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In finance, a '''futures contract''' (sometimes called '''futures''') 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. The item transacted is usually a [[commodity]] or [[financial instrument]]. The predetermined price of the contract is known as the ''forward price'' or ''delivery price''. The specified time in the future when delivery and payment occur is known as the ''delivery date''. Because it derives its value from the value of the underlying asset, a futures contract is a [[Derivative (finance)|derivative]].

Contracts are traded at [[futures exchange]]s, which act as a marketplace between buyers and sellers. The buyer of a contract is said to be the [[Long (finance)|long]] position holder and the selling party is said to be the [[Short (finance)|short]] position holder.<ref name="chicagofed.org">{{cite web|url=http://chicagofed.org/webpages/publications/understanding_derivatives/index.cfm |title=Understanding Derivatives: Markets and Infrastructure – Federal Reserve Bank of Chicago |publisher=Chicagofed.org |access-date=2015-11-09}}</ref> As both parties risk their counter-party reneging if the price goes against them, the contract may involve both parties lodging as security a margin of the value of the contract with a mutually trusted third party. For example, in gold futures trading, the margin varies between 2% and 20% depending on the [[volatility (finance)|volatility]] of the [[spot market]].<ref name=":0">{{Cite web |title=The Gold Futures Market {{!}} Guide & Information from BullionVault |url=https://www.bullionvault.com/guide/gold/Gold-futures |archive-url=http://web.archive.org/web/20170301120411/https://www.bullionvault.com/guide/gold/Gold-futures |archive-date=2017-03-01 |access-date=2025-04-29 |website=www.bullionvault.com}}</ref>

A '''[[Stock market index future|stock future]]''' is a cash-settled futures contract on the value of a particular [[stock market index]]. Stock futures are one of the high risk trading instruments in the market. Stock market index futures are also used as indicators to determine market sentiment.<ref>{{Cite web|last=Martin|first=Ken|date=2020-11-19|title=Stock futures trade lower ahead of jobless claims, retail earnings|url=https://www.foxbusiness.com/markets/stock-futures-trade-cautiously-ahead-of-jobless-claims-retail-earnings|access-date=2020-12-02|website=FOXBusiness|language=en-US}}</ref>

The first futures contracts were negotiated for agricultural commodities, and later futures contracts were negotiated for natural resources such as oil. '''Financial futures''' were introduced in 1972, and in recent decades, [[currency future]]s, [[interest rate future]]s, [[stock market index future]]s, and [[perpetual futures]] have played an increasingly large role in the overall futures markets. Retail traders increasingly use futures contracts alongside options strategies to hedge positions, manage leverage, and scale entries in volatile markets. Even [[organ futures]] have been proposed to increase the supply of transplant organs.<ref>{{Cite journal |last=Albertsen |first=Andreas |date=December 2023 |title=Efficiency and the futures market in organs |url=https://pubmed.ncbi.nlm.nih.gov/37688713/ |journal=Monash Bioethics Review |volume=41 |issue=Suppl 1 |pages=66–81 |doi=10.1007/s40592-023-00180-0 |issn=1836-6716 |pmid=37688713}}</ref>

The original use of futures contracts mitigates the risk of price or exchange rate movements by allowing parties to fix prices or rates in advance for future transactions. This could be advantageous when (for example) a party expects to receive payment in foreign currency in the future and wishes to guard against an unfavorable movement of the currency in the interval before payment is received.<ref>{{Cite web |last=Hayes |first=Adam |date=2024-02-09 |title=Futures Contract Definition: Types, Mechanics, and Uses in Trading |url=https://www.investopedia.com/terms/f/futurescontract.asp |access-date=2025-04-29 |website=Investopedia |language=en}}</ref>

However, futures contracts also offer opportunities for [[speculation]] in that a trader who predicts that the price of an asset will move in a particular direction can contract to buy or sell it in the future at a price which (if the prediction is correct) will yield a profit. In particular, if the speculator is able to profit, then the underlying commodity that the speculator traded would have been saved during a time of surplus and sold during a time of need, offering the consumers of the commodity a more favorable distribution of commodity over time.<ref name=":0" />