Future contract – Meaning

Future contract is a standardized agreement between two parties. This contract allows both the parties (buyer and seller) to buy or sell an underlying asset on a future date at a price agreed today.

The price agreed today simply refers to the date on which both the parties enter into the contract. The underlying assets used in these contracts can be any financial instruments or physical commodities.

It should be noted here that future contracts are special type of forward contracts and possess many common characteristics.

Unlike forward contract, future contracts are traded on exchanges generally known as future exchanges. These contracts are more liquid than the forward contracts as the settlement takes place on daily basis. In the daily basis settlement, investors who incur losses, pay them every day to investors who make profits.

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