Futures Contracts
Futures are standardized legal agreements to buy or sell an asset at a predetermined price at a specified time in the future, traded on exchanges.
Concept map
Learn, apply, review
Definition
Futures are standardized legal agreements to buy or sell an asset at a predetermined price at a specified time in the future, traded on exchanges.
Use case
Used in derivatives workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Futures Contracts
Unlike options, futures obligate both parties. They use daily mark-to-market (settlement) and require margin deposits. Futures exist on commodities, currencies, interest rates, stock indices, and increasingly cryptocurrencies. They're essential tools for hedging commodity price risk and speculating with leverage.
Example: An airline hedges jet fuel costs by buying crude oil futures at $80/barrel for delivery in 6 months. If oil rises to $100, the futures gain offsets the higher physical fuel cost. A speculator without physical exposure profits purely from price direction.
Rank-ready answer
Definition, example, and interview framing
Futures are standardized legal agreements to buy or sell an asset at a predetermined price at a specified time in the future, traded on exchanges.
An airline hedges jet fuel costs by buying crude oil futures at $80/barrel for delivery in 6 months. If oil rises to $100, the futures gain offsets the higher physical fuel cost. A speculator without physical exposure profits purely from price direction.
In an interview, define Futures Contracts, explain where it appears in a real finance workflow, then name one assumption or limitation that a reviewer should check.
FAQ
Frequently Asked Questions
What is Futures Contracts?
Futures are standardized legal agreements to buy or sell an asset at a predetermined price at a specified time in the future, traded on exchanges.
How is Futures Contracts used in finance?
Unlike options, futures obligate both parties. They use daily mark-to-market (settlement) and require margin deposits. Futures exist on commodities, currencies, interest rates, stock indices, and increasingly cryptocurrencies. They're essential tools for hedging commodity price risk and speculating with leverage.
Can you give an example of Futures Contracts?
An airline hedges jet fuel costs by buying crude oil futures at $80/barrel for delivery in 6 months. If oil rises to $100, the futures gain offsets the higher physical fuel cost. A speculator without physical exposure profits purely from price direction.