Futures Contract Definition & Meaning | Financial Term | CSIMarket
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Glossary

Futures Contract

Financial Term

A futures contract is an agreement that two parties enter into to buy or sell a particular asset at a predetermined price and date in the future. The asset may be a commodity, currency, stock, bond, or any other financial instrument. Futures contracts are traded on exchanges, where buyers and sellers can take positions on the price movements of the underlying asset.

Futures contracts are used to manage price volatility and risk in financial markets. For example, a farmer may use a futures contract to sell the crops they will grow in six months at a fixed price, locking in a profit even if the market price of the crop decreases. By the same token, a manufacturer may use a futures contract to buy raw materials at a fixed price, protecting against price increases and ensuring steady supply.

In the financial industry, futures contracts are widely used by investors and traders to speculate on price movements in the markets. For example, a trader may buy a futures contract on a stock index, anticipating that the index will rise in value over time. If the index does indeed rise, the trader can sell the futures contract at a profit.

Futures contracts are highly standardized, with terms such as expiration date and contract size predetermined by the exchange. This standardization makes futures contracts highly liquid, meaning they can be easily bought and sold in the market. It also reduces the risk of default, as the exchange acts as a counterparty to all trades.

Overall, futures contracts are an essential tool for managing risk and speculating on price movements in financial markets.


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