What are futures contracts?

Futures contracts are financial agreements that obligate the buyer to purchase, and the seller to sell, a specific asset at a predetermined price on a specified future date. This financial instrument is commonly used in various markets, including commodities, currencies, and financial indexes, allowing participants to hedge against price fluctuations or speculate on price movements.

The key feature of futures contracts is that they set the terms of the transaction in advance, safeguarding against volatility in the market. This ability to lock in prices can be essential for businesses and investors making long-term plans. The nature of futures contracts as binding agreements with a future execution date differentiates them from other financial instruments that may involve different terms or lack a specific execution timeframe.