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What is a futures contract?

A futures contract is a legally binding agreement to buy or sell a standardized asset on a specific date or during a specific month. Typically, futures contracts are traded electronically on exchanges such as the CME Group, the largest futures exchange in the United States. How do futures contracts work?

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.

Are futures regulated?

Forwards are basically unregulated, while futures contracts are regulated at the central government level. The Futures Industry Association (FIA) estimates that 6.97 billion futures contracts were traded in 2007, an increase of nearly 32% over the 2006 figure.

What types of people trade futures contracts?

There are two types of people who trade (buy or sell) futures contracts: hedgers and speculators. These are businesses or individuals that use futures contracts for protection against volatile price movements in the underlying commodity. A good example to illustrate hedging would be a corn farmer and a corn canner.

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