What are Futures Contract?
A futures contract is just what it's called - a contract. It is not equity in a stock or commodity. It is a contract - a contract to make or take delivery of a product in the future, at a price set in the present. If you agree in April with your aunt that you will buy two kilos of tomatoes from her garden for Rs. 50, to be delivered to you when they're ripe in July, you and your aunt just entered into a futures contract.
In formalized trading of futures contracts on exchanges, standardized agreements specify price, quantity and the month of delivery. Futures markets have their roots in agriculture, but today futures and options on futures are traded on a wide range of products from wheat to natural gas to stock indexes, precious metals and currencies.
To gent into more detail, a "Futures Contract" is a highly standardized contract with certain distinct features. Some of the important features are as under:
a. Futures trading is necessarily organized under the auspices of a market association so that such trading is confined to or conducted through members of the association in accordance with the procedure laid down in the Rules & Bye-laws of the association.
b. It is invariably entered into for a standard variety known as the "basis variety" with permission to deliver other identified varieties known as "tenderable varieties".
c. The units of price quotation and trading are fixed in these contracts, parties to the contracts not being capable of altering these units.
d. The delivery periods are specified.
e. The seller in a futures market has the choice to decide whether to deliver goods against outstanding sale contracts. In case he decides to deliver goods, he can do so not only at the location of the Association through which trading is organized but also at a number of other pre-specified delivery centres.
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