Definition: A futures contract is a contract between two parties where both parties agree to buy and sell a particular asset of specific quantity and at a predetermined price, at a specified date in future.

Description: The payment and delivery of the asset is made on the future date termed as delivery date. The buyer in the futures contract is known as to hold a long position or simply long. The seller in the futures contracts is said to be having short position or simply short.

The underlying asset in a futures contract could be commodities, stocks, currencies, interest rates and bonds. The futures contract is held at a recognized stock exchange. The exchange acts as mediator and facilitator between the parties. In the beginning both the parties are required by the exchange to put beforehand a nominal account as part of contract known as the margin.

Since the futures prices are bound to change every day, the differences in prices are settled on daily basis from the margin. If the margin is used up, the contractee has to replenish the margin back in the account. This process is called marking to market. Thus, on the day of delivery it is only the spot price that is used to decide the difference as all other differences had been previously settled.

Futures can be used to hedge against risk or speculate the prices.