How do futures work?

Futures trade on exchanges and allow traders to lock in the prices of underlying assets named in the contracts. Both parties are aware of the expiration date and prices of these contracts, which are generally established upfront. Each contract carries a multiplier that inflates its value, adding leverage to the position.

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.

Do futures contracts offer opportunities for speculation?

However, futures contracts also offer opportunities for speculation in that a trader who predicts that the price of an asset will move in a particular direction can contract to buy or sell it in the future at a price which (if the prediction is correct) will yield a profit.

How does a futures contract get its name?

A futures contract gets its name from the fact that the buyer and seller of the contract are agreeing to a price today for some asset or security that is to be delivered in the future. Are Futures and Forwards the Same Thing?