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What is a futures contract?

In finance, a futures contract (sometimes called futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset transacted is usually a commodity or financial instrument.

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 .

What is a futures price F0(T)?

compare the value and price of forward and futures contracts Futures are standardized, exchange-traded derivatives (ETDs) with zero initial value and a futures price f0(T) established at inception. The futures price, f0(T), equals the spot price compounded at the risk-free rate as in the case of a forward contract.

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.

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