Futures Contract Definition. A Futures Contract is a contractual agreement that is generally made on the trading floor of a futures exchange and that obligates the Seller to exchange a commodity, currency or financial instrument at a set price on a future date with the Buyer. The Seller is commonly called the “short”, while the Buyer, the “long”. The primary difference between a Future and a Forward is that Futures are typically traded over an exchange, such as an Exchange-Traded Contract, or “ETC”, versus a Forward that is purchased Over The Counter, or “OTC”. An OTC forex contract is typically purchased from a Bank or broker/dealer and is not traded on an exchange. Futures Contracts may call for the physical delivery of the underlying asset or stipulate that a cash settlement is all that is required. A holder of a futures contract may begin to signal his intention regarding delivery of the underlying asset months before the delivery date. A Futures Contract is occasionally abbreviated by coupling the term with its respective asset, as in “forex futures”. These contracts fall under the broad definition of a derivative, which represents a legal obligation to carry out a transaction that has been prearranged according to a stipulated terms for numerous types of financial instruments that establishes its value, such as commodities, currencies, market indexes, interest rates, stocks, and bonds.
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