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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.

What are index futures contracts?

In this article, we explain the basics of index futures contracts and what they represent. An index futures contract is a legally binding agreement between a buyer and a seller, and it tracks the prices of stocks in the underlying index. It allows traders to buy or sell a contract on a financial index and settle it at a future date.

What are the underlying assets of a forward and futures contract?

This acts as collateral to cover the risk of default. The underlying assets associated with forward and futures contracts include financial assets (stocks, bonds, currencies, market indexes, and interest rates) and commodities (crops, precious metals, and oil- and gas-related products).

How do oil futures contracts work?

The contract is settled at the negotiated price, even though the producer may have profited from a higher price per bushel. Oil producers often use futures contracts to sell the commodity. This allows them to lock in a price to sell it and complete delivery once the expiration date hits.

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