Future
A future is a financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash.
History of Futures
Futures have their roots in the agricultural industry, where farmers would enter into contracts to sell their crops at a future date and price. This allowed farmers to plan ahead and manage their risk by locking in a price for their crops before they were harvested. The first futures exchange was the Dojima Rice Exchange in Japan, which began trading in the 1730s. The Chicago Board of Trade (CBOT) was the first futures exchange in the United States, founded in 1848.
Comparison of Futures and Other Financial Instruments
| Instrument | Delivery | Price Determination |
|---|---|---|
| Futures | Physical or Cash | Exchange-determined |
| Options | Cash | Exchange-determined |
| Forwards | Physical or Cash | Negotiated |
Summary
Futures are financial contracts that obligate the buyer to purchase an asset at a predetermined future date and price. They have their roots in the agricultural industry, and the first futures exchange was the Dojima Rice Exchange in Japan in the 1730s. Futures differ from other financial instruments in that they are exchange-determined and can be settled in either physical or cash. For more information on futures, visit the websites of the Chicago Board of Trade, the CME Group, or the Intercontinental Exchange.
See Also
- Options
- Forwards
- Futures Exchange
- Futures Contract
- Commodity Futures
- Derivatives
- Margin
- Speculation
- Hedging
- Arbitrage
