Futures

Futures

Overview

A futures contract is an agreement that calls for a seller to deliver to a buyer a specified quantity and quality of an identified commodity, at a fixed time in the future, at a price agreed to when the contract is made. An option on a commodity futures contract gives the buyer of the option the right to convert the option into a futures contract. Energy futures and options contracts are used by energy producers, petroleum refiners, traders, industrial and commercial consumers, and institutional investors across the world to manage their inherent price risk, to speculate on price changes in energy, or to balance their portfolio risk exposure.

With very limited exceptions, futures and options must be executed on the floor of a commodity exchange through persons and firms registered with regulatory authorities. The contracts are traded either by open outcry, where traders physically transact deals face to face in specified trading areas called pits or rings, or electronically via computerized networks. The futures market provides a standardized trading environment such that all users know exactly what they are trading and where their obligations and risks lie. By entering into a standard futures and/or options contract, a certain amount of price assurance can be introduced into a world of uncertainty and price volatility.

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