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What are Futures Contracts?

A future contract is a financial instrument carrying the obligation to purchase or sell a given share in the future at a fixed price. It is a standardised contract to buy or sell a specified commodity, like a particular share.

Futures contracts are a form of derivative contract that are available for a wide range of commodities and financial instruments. In equity markets futures are most commonly traded on contracts representing equity indices. Although available for individual shares, these are not widely traded at this time.

Futures markets can be used for speculative trading, or for hedging a company's future positions in commodity and financial markets. For example, airlines use futures markets to reduce the risk represented by future changes in oil and fuel prices.

The difference between futures and options are that a future carries the obligation to make or take delivery under the terms of the contract, whereas an option just confers the right to delivery, without any obligation.

The future date involved is called the delivery date, or the final settlement date. The official price at the end of trading on that day will be the settlement price for any open positions maturing on that day.

If the holder of a position in a futures contract wishes to close out his position prior to the final date, he may trade in an opposing contract on the exchange to offset that obligation. Futures are traded on an exchange. The exchange will provide all necessary facilities for settling open positions, as well as determining margin requirements and acting as the counterparty on any trades. The trading price for the future is determined by the best price available for either buy or sell orders on the exchange at any given time.

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