futures contract
A standardized legal agreement to buy or sell a specific asset at a predetermined price at a specified time in the future.
Example
“The farmer sold futures contracts for corn at $5 per bushel, locking in a price before harvest.”
Memory Tip
A FUTURES contract locks in the FUTURE price today.
Why It Matters
Futures contracts allow individuals and businesses to lock in prices for commodities, currencies, or financial instruments, protecting against price fluctuations that could impact their finances or investments. Understanding futures helps investors manage risk and potentially profit from price movements without owning the underlying asset.
Common Misconception
Many people believe futures contracts are only for professional traders or large institutions, but individuals can trade them through brokers with relatively small initial investments. Another misconception is that you must hold a futures contract until expiration, when in reality most traders close their positions before the contract ends.
In Practice
A farmer worried about falling corn prices in six months could sell corn futures contracts today at 5 dollars per bushel for delivery in December. If prices drop to 4 dollars per bushel by December, the farmer is protected because they locked in the higher price, while if prices rise to 6 dollars, the farmer misses out on the extra profit but has guaranteed income certainty.
Etymology
From Latin 'futurus' (that is to be) + 'contractus' (agreed). An agreement about something FUTURE.
Common Misspellings
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See Also
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