WHAT ARE FUTURES CONTRACTS?
Plain English
A futures contract is an agreement to buy or sell something at a set price on a future date. You're locking in a price today for a transaction that happens later. Farmers sell corn futures to guarantee a price; airlines buy oil futures to lock in fuel costs.
Going deeper
Futures contracts are standardized, legally binding agreements to buy or sell a specific asset at a predetermined price on a specific future date. They were originally developed for commodity producers and consumers (hedgers) to manage price risk. Speculators now dominate futures volume, providing the liquidity hedgers need. Key components of any futures contract: Underlying Asset, Contract Size, Delivery Date, Settlement Price, and Tick Size (minimum price movement). Most futures are cash-settled — no physical delivery occurs. Futures trade on centralized exchanges (CME Group, CBOT, NYMEX, ICE) with clearinghouses guaranteeing all trades.
Examples
The Farmer's Hedge
A corn farmer will harvest 50,000 bushels in October. Corn is currently $5/bushel. Fearing prices might fall to $4 by harvest, the farmer sells 10 corn futures contracts ($5 × 50,000 = $250,000 locked in). Even if corn drops to $4, the farmer still receives $5.
Oil Price Lock-In
An airline expects to use 10 million gallons of jet fuel over the next 6 months. Jet fuel is $3/gallon today. They buy crude oil futures to lock in costs. When oil rises to $4, the airline's physical fuel costs go up, but the futures profit offsets the increase.