What are the characteristics of futures contracts?

A futures contract, according to the basis of the definition, is a specific contract of sale, according to which the buyer is obliged to purchase and the seller to sell a given quantity of the underlying instrument. At the same time, the above action must be performed at a certain time in the future, at a defined price, accepted by both parties. What are the characteristics of futures contracts, which are one type of the above contract?

Fundamental definition

The date of the creation of the first ever futures contract is considered to be 1851, when it was concluded at the Chicago Board of Trade (CBOT), the world’s oldest futures and options exchange. In this type of contract, the buyer expresses a desire to purchase a particular instrument at a certain price in the future. The intermediary in the transaction is the futures exchange in question, imposing the terms.

A futures contact precisely defines elements such as:

the underlying instrument
the size of the contract
duration
other terms and conditions

Contracts of this type are concluded in order to avoid the impact of situational variables on the market, and both parties are ready to take the associated risks. All futures contracts are concluded with the intermediation of an exchange, which controls the course of the entire transaction and provides legal security for it.

Futures vs. forward contracts

Forward contracts, in opposition to futures, are concluded without the intermediation of an exchange, through the buyer and seller, respectively. This involves considerably more risk than in the case of futures, where the institution in this form is a partial guarantor of security and full fulfillment of the contract. Fulfillment of the terms of the contract is based largely on mutual trust, so it is worth considering signing this type of contract.

Thedifference between futures and forward contracts is related to the purposes for which they are used. The first of the above-mentioned contracts are used depending on speculation, quick earnings or manipulation of the price itself, and their advantage is certainly having an intermediary over each other in the form of a futures exchange and ensuring anonymity. Forward contracts, on the other hand, are a guarantee of the purchase of given instruments at a predetermined price, but one should be particularly cautious with them, because of the need to personally assert one’s right in the event of default by one of the parties.

Brigham Hill

As Brigham Hill, the creator of Inlogic.eu, my passion for diverse knowledge and sharing it with the world has led me to establish a digital portal that explores a wide range of topics. My background, rooted in an insatiable curiosity about the world, drives the website’s content, from health and beauty, motorization, to legal and even taboo subjects. I believe in the power of education and information, aiming to make it accessible to everyone. My journey into this venture began with a simple desire to create a space where learning and sharing knowledge are valued above all. Through Inlogic.eu, I've strived to connect with like-minded individuals who seek understanding and insights into the various facets of our lives, demonstrating my commitment to a well-informed community.