What Is a Futures Contract Quizlet?

A futures contract is a legally binding agreement between two parties, where they both agree to buy or sell a specific underlying asset at a predetermined price and time in the future. In simpler terms, it is a contract to buy or sell something at a later date for a specified price.

Futures contracts were originally created to help farmers and producers to mitigate their risks against adverse price movements in the commodity market. Today, futures trading has expanded to include a wide range of financial assets, including stocks, bonds, currencies, and more.

Futures contracts are standardized agreements, traded on regulated exchanges, where the terms of the agreement, such as the underlying asset, contract size, delivery date, and delivery location, are predetermined. This standardization helps to promote liquidity, transparency, and price discovery in the market.

One of the key features of futures contracts is leverage. Traders are required to post an initial margin, which is a small percentage of the total contract value, to open a position. This allows traders to control a much larger position than they would have been able to with their initial investment. However, leverage can also amplify losses if the trade goes against the trader.

Futures contracts can be settled in two ways, either through physical delivery or cash settlement. Physical delivery means that the underlying asset is delivered to the buyer or seller on a specific date, at a specific location, as stipulated in the contract. Cash settlement, on the other hand, means that the difference between the contract price and the market price is settled in cash, without the need for physical delivery.

In conclusion, a futures contract on Quizlet is a legally binding agreement between two parties to buy or sell a specific underlying asset at a predetermined price and time in the future. Futures trading is a popular way to trade commodities, currencies, and other financial assets, with standardized agreements traded on regulated exchanges. While futures trading offers leverage and the potential for significant profits, it also carries significant risks, particularly for inexperienced traders.