What is a futures contract?

Futures contracts are financial derivatives that oblige the buyer to purchase some underlying asset (or the seller to sell that asset) at a predetermined future price and date. A futures contract allows an investor to speculate on the direction of a security, commodity, or financial instrument, either long or short, using leverage.

Who is obligated to deliver a futures contract?

Buyers of futures contracts are obligated to take delivery of the underlying asset when the contract expires, and sellers are obligated to deliver. Some contracts require the delivery of a physical asset, while others are cash-settled. Futures track a wide range of commodities and financial assets.

Is a futures contract a derivative?

The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price. The specified time in the future when delivery and payment occur is known as the delivery date. Because it derives its value from the value of the underlying asset, a futures contract is a derivative .

Why do oil producers use futures contracts?

They use futures contracts to ensure that they have a buyer and a satisfactory price, hedging against any changes in the market. An oil producer needs to sell its oil. They may use futures contracts to lock in a price they will sell at, and then deliver the oil to the buyer when the futures contract expires.