Futures

Futures are a type of contract used to speculate on the future price of a wide variety of assets, from crude oil to cryptocurrencies. In a contract, a buyer and a seller agree on a certain price for a given asset that will be made at a later date.

People often confuse futures contracts with forwarding contracts because they are very similar in nature. The main difference is that futures are exchange-traded, whereas forwards are traded over-the-counter.

This means that contracts must be standardized whereas forwards are highly customizable.

Another important difference between the two is that futures are “marked to market” every day, meaning that the difference in the value of the future to the current price is settled between the parties on a daily basis.

Finally, with forwarding contracts, the parties are actually interested in taking possession of the asset being traded, whereas can be closed before the settlement date and so are often used purely to speculate on the changing price of the underlying asset rather than to actually take possession of it.