A futures contract is an agreement to buy or sell an asset at a specific price on a specific future date. Both parties are obligated to complete the transaction. The contract specifies the asset, the quantity, the price, and the delivery date. Futures trade on exchanges and are standardized, which makes them liquid. They are used by hedgers to manage risk and by speculators to bet on price movements.

The origins are agricultural. Farmers wanted to lock in prices for crops before harvest. Buyers wanted to secure supply. The Chicago Board of Trade formalized this in 1848. Today, futures cover commodities, currencies, interest rates, and stock indices. Most contracts are settled in cash rather than physical delivery. A farmer rarely delivers 5,000 bushels of corn. A trader rarely takes possession of 1,000 barrels of oil. The contract is closed before expiration.

Futures use leverage. A trader posts a small margin, often 5 to 15 percent of the contract's value. That leverage amplifies gains and losses. A 1 percent price move can produce a 10 percent gain or loss on the margin. This makes futures risky for inexperienced traders. They are also essential for managing risk in agriculture, energy, and finance. The same tool serves both purposes.

Key terms

• Underlying asset
• Expiration date
• Margin requirement
• Mark-to-market
• Cash settlement vs. delivery