Short definition: A futures contract is a standardized, legally binding agreement to buy or sell a specific quantity of an underlying asset (e.g., commodities, currencies, or financial instruments) at a predetermined price on a specified future date.
Explanation: Futures contracts are traded on organized exchanges and are used for both hedging and speculation purposes. They provide market participants with a way to manage price risk or to profit from anticipated price movements in the underlying asset.
Example: A farmer might sell corn futures contracts to lock in a price for their crop before harvest, thereby protecting against a potential decline in corn prices.
Additional information (optional): Futures contracts are standardized in terms of contract size, delivery date, and quality specifications. They are marked-to-market daily, meaning that gains and losses are settled each day based on the current market price of the underlying asset.