A futures contract gives the holder the right and the obligation to buy or sell. Contrast this with an options contract, which gives the buyer the right, but not the obligation, and the writer (seller) the obligation, but not the right. In other words, an option buyer can choose not to exercise when it would be uneconomical for him. The holder of a futures contract and the writer of an option, do not have a choice. To exit the commitment, the holder of a futures position has to sell his long position or buy back his short position, effectively closing the position. Futures contracts are exchange traded derivatives. The exchange acts as counterparty on all contracts, sets margin requirements, etc.

The motivations of futures market participants can be divided into two broad categories: hedging, seeking to reduce the risk associated with owning the commodity or financial instrument underlying a futures contract; and speculating, seeking to profit from price changes in those contracts over time. Both approaches contribute to fair and orderly markets.

Where are Futures Contracts traded?

Historically, futures contracts have been typically traded on an exchange where traders and brokers compete on equal footing in an auction-style, open-outcry market. Communicating by voice and hand signals, brokers and traders match orders based on the best prevailing market price. By centrally locating trading, exchanges provide an opportunity to minimize risk by allowing hedgers to protect themselves against adverse price swings and speculators to profit from such market moves.

In addition to providing a focal point for trading, futures exchanges also provide speedy clearing of trades, accurate recording of prices and trading limits to promote fair and orderly markets. Firms that are members of the exchange guarantee all the contracts traded by their customers by posting funds against outstanding positions. The exchange's function as a clearinghouse promotes overall confidence in the futures markets.

With the advent of technology, electronic trading has gained a foothold in the industry. Trading by means of electronic order matching, electronic trading offers more market transparency and faster reporting. While most European futures markets are fully electronic, futures trading in the United States of America is still dominated by the open outcry method during normal business hours; however, technology is quickly overhauling this process.