The object of futures trading is the futures contract, which may be defined as a highly standardized forward contract. Although the terms ‘forward’ and ‘futures’ are often used interchangeably in the older literature, the distinction is essential to the understanding of futures trading. Forward contracts are widely used; thus an agreement in which an automobile dealer undertakes to deliver a car of a specified make, type and colour to a customer at some later date is a forward contract; so is an employment contract, in which the employee promises to perform specified services during a certain period of time. Because forward contracts are typically quite specific, the employee in the last example cannot substitute another worker for himself without the employer’s consent. Futures contracts, by contrast, exist only for a limited number of commodities and financial instruments, and are used only by a relatively small number of firms and individuals.
KeywordsRisk Premium Future Market Future Price Financial Instrument Future Contract
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