What are Futures?

Answer:
Futures, also called “forward contracts,”

are a financial derivative where the seller is obligated to provide a particular commodity or asset to the purchaser at an agreed upon, future date.

Commodities such as wheat, oil, sugar, and coffee as well as financial products such as foreign currencies, government bonds, and stock market indexes are commonly traded in the futures market.

In the U.S., the Commodity Futures Trading Commission regulates futures transactions. Exchanges are a big part of futures trading. Each futures contract has characteristics such as the nature of the underlying asset, delivery date, transaction currency, contract trading stop point, and the tick size.

Exchanges standardize these characteristics across numerous futures contracts, creating a large, predictable marketplace. Futures trading poses a significant risk. History has recorded numerous financial disasters that started with futures trading.

In fact, at one point, money was being lost so rapidly by a large capital management firm due to futures contracts that the U.S. Federal Reserve Bank had to intervene. The Reserve prevented a system-wide financial meltdown by arranging a bailout.


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