Futures contracts as they relate to financing is a simple contract is designed to allow anyone to eventually buy or sell certain products will be delivered at a later date. Generally, there are certain dates and deadlines that must be met to be a valid contract.
These types of transactions are never offered on the usual stock market but you will find them in what is commonly known as a futures exchange. They are not considered to be securities in the strictest sense as stocks or bonds can be. They are a type derivative. A futures options contract or commodity option is a derivative also.
The actual prices for different commodities varies depending on supply and demand. If the pork belly is bad harvests, prices will probably be high, while a myriad of Coco would result in a lower than normal price. The future date is known as the delivery date, while the daily offer of exchange would be the settlement price.
In a nutshell, what in futures trading, a contract that the holder may take delivery of the commodity at a later date, however, futures contracts must be respected by the settlement date. On settlement date the seller will deliver the asset to the buyer, whether it is coconut or pork bellies or whatever. In order to meet their obligations within the established settlement date you must offset your position by selling if you bought a futures or buy back if you had a previous short position, which ultimately allows you to balance it all out.
An interesting side note here is that if you buy a futures contract and do nothing what so ever, and the settlement day arrives you can end up with a yard full of assets that you do not really want. Unlike stocks and bonds, we are talking real-time products here.
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