Glossary

Futures

A future is a contract to buy or sell a specified asset at an agreed price and date in the future. In this respect, it is similar to a forward trade. However, these two types of derivative are traded in very different ways. Whereas forward contracts are negotiated over-the-counter between two parties according to specifically agreed terms, futures are traded on exchanges subject to standardized contracts.

The key difference is that buyers of forwards generally expect that they will be delivered, whereas futures trades are more typically speculative bets on the direction in which asset prices will move. The vast majority of futures contracts are closed out before delivery of the underlying asset (many companies trading in wheat derivatives do not own grain silos).

The flow of money is also very different in the case of forwards and futures. Futures trading results in daily interim payments as the market value of the derivative changes. These marginal differences are the basis for speculation. By contrast, the only payments in the case of forwards come once the trade is settled, at a contractually agreed date that may coincide with delivery of the product.

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