If we are talking about futures contract, you must be dappling with the derivatives market. This is a lucrative market to play with, albeit a risky one. But if played with the proper strategies, the derivatives market can prove profitable in a short span of time.
Futures are a form of derivatives. A futures contract is a contract that can be traded on futures markets, with the intention of buying or selling underlying instruments at a certain date in the future at a specific price. The date which is fixed is known as the delivery date or the final settlement date. The futures price which is set is also known as the pre-set price. Price of the underlying asset on the due date of delivery is known as the settlement price.
Such a contract comes with the actual obligation to buy or sell, contrary to options, which only provide the right to buy and sell and not the actual obligation. In a futures contract, on the other hand, both parties are required to satisfy the conditions of the contract on the settlement date.
If the underlying asset being traded is a commodity, then the delivery of the physical goods has to take place on the delivery date. In case of stock futures as are done in India, cash settlement occurs whereby the one who makes a loss transfers cash to the one making the profit. In many instances, one can exit or close their position in a futures contract before the delivery date by either buying back a short position or selling a long hand which closes out the futures position and the obligations of the contract are also closed.
Such contracts are essentially forward contracts since the agreement is to buy or sell at a pre determined price for a point in time in future. There are various features of such future contracts. Standardization of a contract as to having the details specified is a characteristic of futures contract. For instance, the underlying asset and the category it falls into, whether commodities such as crude oil, gold or real estate or stocks, market indices and others. The type of settlement to be made is also specified in the contract. From cash to physical goods delivery, the terms are to be specified in the contract. The amount and units of the asset, the currency in which the contract is made, grade of deliverables, delivery month, last trading date are other details that are required to be mentioned in a trading contract.
Futures contracts guidelines are laid down by the Securities & Exchange Board of India (SEBI) and it is vigilant against fraudulent practices being performed in the futures market.