The futures contract

This contract is an agreement to buy or sell an asset at a certain time in the future for a certain price. Futures are traded in exchanges and the delivery price is always such that today's value of the contract is zero. Therefore in principle, one can always engage into a futures without the need of an initial capital: the speculators heaven!

Although similar in nature, these two instruments exhibit some fundamental differences in the organization and the contract characteristics. The most important differences are given in table 1.1.

Table 1.1: Differences between forwards and futures contracts

	Forwards	Futures
Primary market	Dealers	Organized Exchange
Secondary market	None	the Primary market
Contracts	Negotiated	Standardized
Delivery	Contracts expire	Rare delivery
Collateral	None	Initial margin, mark-the-market
Credit risk	Depends on parties	None [Clearing House]
Market participants	Large firms	Wide variety

In the example 3, a futures contract was not available for the investor to hedge against the interest rate risk. One can now see that she could alternative go to some investment company seeking for a forward contract that would suit her needs. Forwards and in particular futures are discussed in detail in chapters 2 and 3.