Futures
Futures are financial contracts that obligate 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 trading has its roots in the 19th century, when farmers and merchants began trading forward contracts to hedge against price fluctuations in agricultural commodities. The first organized futures exchange, the Chicago Board of Trade, was established in 1848. Since then, futures trading has grown to include a wide range of assets, including stocks, bonds, currencies, and commodities. Today, futures are traded on exchanges around the world.
Comparison of Futures and Other Financial Instruments
| Instrument | Delivery | Risk | Leverage |
|---|---|---|---|
| Futures | Physical or Cash | High | High |
| Options | Cash | High | High |
| Stocks | Physical | Medium | Low |
| Bonds | Physical | Low | Low |
Summary
Futures are financial contracts that obligate the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price. Futures trading has its roots in the 19th century, when farmers and merchants began trading forward contracts to hedge against price fluctuations in agricultural commodities. Futures are traded on exchanges around the world and offer high leverage and high risk. For more information about futures, visit the websites of the Chicago Board of Trade, the New York Mercantile Exchange, and the Intercontinental Exchange.
See Also
- Options
- Stocks
- Bonds
- Forward Contracts
- Commodities
- Derivatives
- Hedging
- Speculation
- Margin
- Leverage
