A standardized, transferable, exchange-traded contract that requires
delivery of a commodity, bond, currency, or stock index, at a specified
price, on a specified future date. Unlike options, futures convey an
obligation to buy. The risk to the holder is unlimited, and because the
payoff pattern is symmetrical, the risk to the seller is unlimited as well.
Dollars lost and gained by each party on a futures contract are equal and
opposite. In other words, futures trading is a zero-sum game. Futures
contracts are forward contracts, meaning they represent a pledge to make a
certain transaction at a future date. The exchange of assets occurs on the
date specified in the contract. Futures are distinguished from generic
forward contracts in that they contain standardized terms, trade on a
formal exchange, are regulated by overseeing agencies, and are guaranteed
by clearinghouses. Also, in order to insure that payment will occur,
futures have a margin requirement that must be settled daily. Finally, by
making an offsetting trade, taking delivery of goods, or arranging for an
exchange of goods, futures contracts can be closed. Hedgers often trade
futures for the purpose of keeping price risk in check. also called
futures.
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