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What Is A Futures Contract?
A futures contract is an obligation to buy or sell a commodity at some time in the future, at a price agreed upon today.
- The contracts themselves are interchangeable. That is to say, they are standardized as to terms like what grade of commodity is acceptable and when and where it can be delivered.
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- The word commodity is defined very broadly to include financial instruments and stock indexes.
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- The contracts are traded on an organized and regulated futures exchange so that buyers and sellers can easily find each other .
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Please Note: A futures contract is an obligation (not a right like an option) and that obligation must be fulfilled. In most cases it's fulfilled by simply making an offsetting trade that takes the trader out of his position (sold if one has bought; bought if one has sold). But strictly speaking, the trader can choose to carry the position all the way to the delivery date, when it's fulfilled either by the exchange of the physical commodity or by a cash settlement . |
