From the course: Derivatives Fundamentals

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Purpose and structure of futures contracts

Purpose and structure of futures contracts

From the course: Derivatives Fundamentals

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Purpose and structure of futures contracts

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- [Instructor] Now let's look at futures contracts. So what is a futures contract? Well, a futures contract is very similar to a forward contract in that it's an agreement to exchange an underlying asset for a pre-specified price at a specific date in the future. However, there are some major differences. First, futures contracts aren't customized, they're standardized. They also trade on derivatives exchanges, like the CME or ICE. Futures contracts also involve depositing something called an initial margin that we'll explore in more detail. Finally, futures contracts are marked to market daily, which can lead to margin calls, and we'll explain that as well. So let's get going. Futures contracts, like forwards, can be used for hedging. However, futures contracts are often more attractive for speculating than forwards, and it's because of two key characteristics of a futures contract. First of all, futures contracts offer liquidity because they're traded on exchanges. Futures contracts…

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