Futures contract

Definition of 'Futures contract'

A futures contract is a legally binding arrangement where one party commits to buying an asset from another party on a specified date in the future, but at a price agreed previously. The counterparty is obliged to sell the asset at the agreed price and on the agreed date.

Because the price is agreed at the outset the seller (buyer) is protected from a fall (rise) in the price of the underlying asset in the intervening time period. Initially developed to protect agricultural producers from unforeseen market fluctuations - hedging.

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