Glossary Term

Futures

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Futures are a type of contract used to speculate on the future price of a wide variety of assets, from crude oil to cryptocurrencies. In a futures contract, a buyer and a seller agree on a certain price for a given asset that will be made at a later date. People often confuse futures contracts with forward contracts because they are very similar in nature. The main difference is that futures are exchange traded, whereas forwards are traded over-the-counter. This means that futures contracts must be standardized whereas forwards are highly customizable. Another important difference between the two is that futures are ‘marked to market’ every day, meaning that the difference in the value of the future to the current price is settled between the parties on a daily basis. Finally, with forward contracts, the parties are actually interested in taking possession of the asset being traded, whereas futures can be closed before the settlement date and so are often used purely to speculate on the changing price of the underlying asset rather than to actually take possession of it.

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