Beginner’s Guide to Futures Contracts
A futures contract is a standardized derivatives agreement to buy or sell a specified quantity of an asset at a predetermined price in the future. It can be used to manage price risk or respond to anticipated price fluctuations, but both parties are obligated to perform at expiration.
How Futures Contracts Work
A futures contract specifies the underlying asset, quantity, price, and settlement date in advance. At expiration, regardless of the market price, the buyer and seller are generally required to perform as agreed. If they do not intend to hold the contract until settlement, traders can establish an equal and opposite contract to offset the original position, or close the current position and replace it with a contract with a later expiration date.
Differences Between Futures, Options, and Forwards
An option gives its holder the right to buy or sell, but does not require performance; the parties to a futures contract, however, have an obligation to perform. Forward contracts are typically privately customized between the parties and traded over the counter, whereas futures contracts are traded on trading platforms and have standardized specifications for contract size, settlement date, and asset quality, among other terms. As a result, futures contracts are generally more liquid but less flexible for customization.
Two Settlement Methods
Physical delivery involves delivering the actual underlying asset to the buyer at expiration; cash settlement involves transferring cash based on the difference between the contract price and the market price at expiration. Cash settlement is more common in markets where physical delivery is difficult. Futures underlyings can include fiat currencies, stocks, indices, government debt instruments, cryptocurrencies, and various commodities.
Original Tutorial
https://www.binance.com/zh-CN/academy/glossary/futures-contract
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