Futures contracts represent an agreement between two parties to trade an asset at a defined price on a specified date in the future. They are also often referred to simply as ‘futures’.
Most futures contracts are traded on exchanges, and they are best known in relation to commodities trading. However, they can be used to trade other assets such as stock indices. While some futures will require the asset itself to change hands, others are settled in cash.
All futures contracts have an expiry date and some future contracts may also have a delivery date: the date at which the underlying asset has to be delivered (at least in theory). They differ in this respect from ‘spot’ prices, which reflect the price of a market if the trade were to be completed that day.
Futures contracts are standardised, and specify the quality and quantity of the underlying asset. They are often used to hedge against other trades, as well as for speculation. For businesses, they present a way to lock in the price of a commodity for the long term, keeping prices stable.