Futures

Futures contracts are like forwards, but they are standardised and often publicly traded on exchanges. Futures are used both to hedge and as (fairly speculative) investments in themselves.

Futures are most often used in commodity and currency markets where both producers and buyers gain security from fixing their buying or selling prices, but have little to gain by paying the extra for an option as their possession of, or foreseeable future need for, the underlying commodity or currency is hedged by the future.

As with options, almost all futures traded on exchanges are settled by payment of their value on the day they expire rather than by delivery of the underlying asset.

Not everything that is called a future meets the (strictly correct) definition discussed above. Many are contracts for difference, such as index futures.

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