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Futures Market

  • Need of Futures Markets – To manage asset price risk (uncertainty of prices over time) of traders, merchants, dealers, farmers etc.
  • Futures Contract – An agreement between two parties, one to buy (long) and the other to sell (short), a fixed quantity and grade of an underlying asset at an agreed upon price on or before a given date in future.
  • Key characteristics of Futures:
    • The buyer of futures contract (long), contracts to receive delivery
    • The seller of futures contract (short), contracts to make delivery and accept payment
    • Futures contracts are tradable. Futures on same or similar commodities can be traded on more than one exchange
    • Futures contract can be terminated by an Offsetting
    • Futures contract can be settled by physical delivery or cash
  • Terms of futures contract (standardized by the exchange)
    • Underlying or spot – the underlying asset such as commodity, security, currency, index etc.
    • Contract size
    • Settlement mechanism – physical delivery or cash settlement
    • Delivery or Maturity date
    • Specific grade or quality


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