Finance
Futures Contracts
Agreeing today on a price for something you'll buy or sell in the future — locking in certainty now, in exchange for giving up the chance to benefit if the price moves in your favor instead.
Definition
A futures contract (or its close relative, a forward contract) is an agreement made today to buy or sell a specific asset — a commodity, a currency, a financial instrument — at a specific price, on a specific future date, regardless of what the asset's market price actually turns out to be by then. Whoever agrees to buy holds the long position; whoever agrees to sell is short.
Why this exists
Many businesses and individuals have to plan around a price that won't actually be known until some point in the future — a farmer doesn't know what price their crop will fetch at harvest months from now; an airline doesn't know what it'll pay for fuel next quarter; a company expecting payment in a foreign currency next year doesn't know today's exchange rate will still apply. That uncertainty is itself a real cost and a real risk (per Risk & Return), even before anything actually happens — planning, budgeting, and pricing all become harder when a key input could swing significantly in either direction.
A futures or forward contract exists to remove that specific uncertainty, by letting two parties agree today on the price for a future transaction, regardless of where the market price actually ends up. The farmer can lock in a sale price for their crop months before harvest, guaranteeing a specific revenue regardless of whether crop prices later rise or fall; the airline can lock in a fuel price, protecting its budget from a spike; a business expecting foreign currency can lock in today's exchange rate for a payment months away. In every case, the contract trades away the chance of benefiting if the price moves favorably, in exchange for protection against the price moving unfavorably — certainty, not a bet on a better outcome.
Because both sides commit to a fixed price regardless of where the market actually ends up, a futures contract is fundamentally a zero-sum arrangement between the two parties involved: whatever one side gains relative to just transacting at the future market price, the other side loses by exactly the same amount, since they're both anchored to the same agreed price while the market moves around it. This is different from simply owning an asset outright, where both a buyer's gain and a seller's foregone gain move together with the market rather than against each other.
Formula & mechanics
Long position P&L: (Market price at settlement − Agreed price) × contracts Short position P&L: (Agreed price − Market price at settlement) × contracts
- A long position profits when the market price ends up higher than the agreed price — you locked in a price that turned out to be a bargain.
- A short position profits when the market price ends up lower than the agreed price — you locked in a price that turned out to be a premium.
Worked example
A farmer sells — goes short — a futures contract locking in a corn price of $5.00/bushel for 10,000 bushels, months before harvest.
Market falls to $4.20/bushel at harvest: Short P&L = ($5.00 − $4.20) × 10,000 = +$8,000 (locked in the better price) Market rises to $5.80/bushel at harvest: Short P&L = ($5.00 − $5.80) × 10,000 = −$8,000 (gave up the higher price)
Either way, the farmer's total revenue is fixed at $50,000 (10,000 × $5.00) — the futures contract didn't necessarily make the farmer richer, it made their revenue predictable, which was the entire point.
Try it yourself
Profit
$8,000.00
Total locked-in value
$50,000.00
Price difference
-$0.80 / unit
How the math works
Short P&L = (Agreed price − Market price) × contracts
= ($5.00 − $4.20) × 10000
= $8,000.00This P&L is relative to what you'd have gotten transacting at the market price instead — the whole point of locking in the agreed price was certainty, not necessarily coming out ahead.
Common misconceptions
“Futures contracts are primarily a way to make speculative bets, not to manage risk.”
While futures can be used to speculate — betting on price direction without ever intending to buy or sell the underlying asset — their original and still-common purpose is the opposite: transferring away price risk that a business or individual would otherwise have to bear.
“If the market price ends up better than the agreed price, you can just walk away from a futures contract.”
A futures contract is a binding commitment — walking away isn't an option, barring closing out the position beforehand with an offsetting trade. That firm commitment on both sides is exactly what makes the price-locking work.
“Going 'long' or 'short' a futures contract means the same thing as owning or not owning the underlying asset.”
A futures position is a separate financial agreement about a future price, not ownership of the actual underlying asset — settlement can even happen entirely in cash, with no asset ever changing hands.
Also in the Glossary: Futures Contract, Long Position, Short Position