Futures Contracts are binding agreements between two parties to buy or sell a specific asset (such as oil, gold, currencies, or indices) at a predetermined price on a specified future date.
The idea is simple:
You are not buying the actual asset now, but rather agreeing with another party on the price at which you will buy the asset in the future, regardless of the actual price at that time.
A simple example:
Suppose you believe that the price of oil will rise over the month. You buy a futures contract to purchase a barrel of oil at $70 after a month.
If the price rises to $80, you profit $10 per barrel.
If it drops to $60, you lose $10 per barrel.
Characteristics of futures contracts:
A specific expiration date.
A pre-agreed price.
Traded on regulated exchanges (such as the Chicago Exchange).
Used for hedging or speculation.
The difference between them and spot contracts:
Spot contract: buying or selling is done immediately at the current price.
Futures contract: buying or selling is done in the future at a price agreed upon now.
