Futures contract

A legal agreement between a buyer (seller) and an established exchange or its clearing house in which the buyer (seller) agrees to take (make) delivery of a given quantity of something at a specified price at the end of a specified period. The price at which the parties agree to transact in the future is called the futures price. The designated date at which the parties must transact is called the settlement or delivery date. Futures contracts are traded o a futures exchange and have standard delivery dates, trading units, terms and conditions. Like forwards, futures differ from options in that they represent an obligation to buy or sell the underlying. Unlike forwards, they have standard delivery dates, trading units and terms and conditions. They are available on a wide range of financial and commodity assets, generally expire quarterly and can be cash or physically settled. They are traded on exchanges which act as counterparties to all transactions and which run margining systems. Futures traders must set aside a margin as collateral against their positions. First, an initial margin must be deposited with a clearing house on entering a trade. Thereafter futures positions are marked-to-market daily and a variation margin is paid/received to maintain the required level of collateralization. The role of the exchange and the margin system significantly limit credit risk.