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
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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.