What characterizes a futures contract?

A futures contract is characterized by representing a standardized legal agreement between two parties to buy or sell a specified asset at a predetermined price on a specified date in the future. This standardization includes the quantity of the underlying asset, the quality (if applicable), and the delivery terms, making it easier to trade on exchanges.

The standardized nature of futures contracts is vital for their function in risk management and speculation, as it allows for liquidity and consistent pricing. This means that all participants in the market are trading the same terms, which facilitates open and efficient transactions.

On the other hand, futures contracts are not always privately negotiated; they are typically traded on exchanges where terms are set by the exchange itself. They do feature a fixed price at the time the contract is initiated, which is a key element that differs from other types of contracts that may allow for variable pricing. Lastly, while futures can be applied to various asset classes, including commodities and currencies, they are not limited to stocks alone, as they encompass a wide range of underlying assets.