Who uses futures contracts?

Futures contracts are used by two categories of market participants: hedgers and speculators. Producers or purchasers of an underlying asset hedge or guarantee the price at which the commodity is sold or purchased. They use futures contracts to ensure that they have a buyer and a satisfactory price, hedging against any changes in the market.

What happens when a futures contract expires?

The buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires. The seller of the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date.

What is the price of entering a futures contract?

The price of entering a futures contract is equal to zero. At time T, the holder pays F (T,T) and is entitled to receive J. Note that F (T,T) should be the spot price of J at time T. A closely related contract is a forward contract.

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 .