Futures

From Reuters Financial Glossary

A future is an undertaking to buy or sell a standard quantity of a financial asset or commodity at a future date and at a fixed price. Futures resemble forwards, but are standardized contracts (ie. every futures contract has standardized terms that dictate the size, the unit of price quotation, the delivery date and contract months) and must be traded on a recognized exchange. Price movements are expressed in ticks (the smallest unit of price quotation). Delivery of a future is rare. As the delivery date draws near, most investors close out their positions by undertaking an equal and opposite trade. The futures markets bring together hedgers who wish to protect themselves against the rise or fall of prices, and speculators who are trying to benefit from such movements. A clearing house acts as the counter party in every transaction to protect against the risk of default, so the buyer and seller do not have to deal directly with each other. Futures developed as a method for establishing forward purchase prices and managing price instability caused by seasonal factors in agricultural markets. Today, interest rate and stock index futures attract the greatest volume.

See also: Clearing House, Forwards, Hedging, Margin, Option, OTC, Tick