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Simple English definitions for legal terms
futures contract
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A quick definition of futures contract:
A futures contract is an agreement between two people to buy or sell something at a certain time in the future, at a price that is agreed upon now. This can be used for things like crops, animals, energy, or even stocks. It helps people protect themselves from changes in prices.
A more thorough explanation:
A futures contract is a legal agreement between two parties to buy or sell a specific commodity at a predetermined price and date in the future. The Commodity Futures Trading Commission (CFTC) is responsible for regulating futures contracts in the United States. Futures contracts can be used to protect against price fluctuations.
- A farmer may enter into a futures contract to sell their crop at a set price before it is even harvested. This protects them from a drop in market prices.
- An airline may enter into a futures contract to buy fuel at a set price in the future, protecting them from price increases.
- A company may enter into a futures contract to buy a certain amount of gold at a set price in the future, protecting them from price fluctuations.
These examples illustrate how futures contracts can be used to manage risk and protect against price changes. By entering into a futures contract, parties can lock in a price for a commodity, which can be beneficial for both buyers and sellers.