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A future contract is a standardized contract between two parties where one of parties commits to sell, & other party commits to buy, a stipulated quantity (& quality, where applicable) of the commodity, currency, security, index or some other specified item at an agreed price on or before a given date in the future.
The futures contracts represent an improvement over the forward contracts in terms of standardization, performance guarantee & liquidity. Thus whereas forward contracts are not standardized, the future contracts are standardized ones, so that
1. The quantity of the commodity or the other asset, which would be transferred or would form the basis of gain/loss on maturity of a contract.
2. The quantity of the commodity - if a certain commodity is involved - & the place where delivery of the commodity would be made.
3. The date & month of delivery
4. The units of price quotations
5. The minimum amount by which the price would change (tick size) & the price limits for a day's operations, & other relevant details are all specified in a futures contract. Thus in a way, it becomes a standard asset, like any other asset.
Futures contracts are traded on commodity exchanges or other future exchanges. People can buy or sell futures like commodities.
When an investor buys a future contract on an organized futures exchange, he is in fact assuming the right & obligation of taking delivery of the specified underlying item on a specified date. Similarly when an investor sells a contract, to take a short position one assumes the right & obligation to make delivery of the underlying asset.
The futures contracts represent an improvement over the forward contracts in terms of standardization, performance guarantee & liquidity. Thus whereas forward contracts are not standardized, the future contracts are standardized ones, so that
1. The quantity of the commodity or the other asset, which would be transferred or would form the basis of gain/loss on maturity of a contract.
2. The quantity of the commodity - if a certain commodity is involved - & the place where delivery of the commodity would be made.
3. The date & month of delivery
4. The units of price quotations
5. The minimum amount by which the price would change (tick size) & the price limits for a day's operations, & other relevant details are all specified in a futures contract. Thus in a way, it becomes a standard asset, like any other asset.
Futures contracts are traded on commodity exchanges or other future exchanges. People can buy or sell futures like commodities.
When an investor buys a future contract on an organized futures exchange, he is in fact assuming the right & obligation of taking delivery of the specified underlying item on a specified date. Similarly when an investor sells a contract, to take a short position one assumes the right & obligation to make delivery of the underlying asset.