Futures contracts are financial derivatives that obligate parties to buy or sell an asset at a predetermined future date and price. These contracts are standardized agreements traded on organized futures exchanges. Futures contracts serve various purposes, including hedging against price fluctuations, speculating on price movements, and providing liquidity to the markets. Here are key characteristics and components of futures contracts:

1. **Underlying Asset:**
– Futures contracts are based on an underlying asset, which can include commodities (e.g., gold, oil, soybeans), financial instruments (e.g., bonds, interest rates), stock market indices (e.g., S&P 500), or foreign exchange rates.

2. **Standardization:**
– Futures contracts are standardized with regard to contract size, expiration date, and other specifications. Standardization facilitates trading on the exchange and ensures that all contracts of a particular type are the same.

3. **Contract Size:**
– Each futures contract has a specific quantity or contract size of the underlying asset. For example, a gold futures contract might represent 100 troy ounces of gold.

4. **Expiration Date:**
– Futures contracts have a fixed expiration date, indicating when the contract will be settled. At expiration, traders must either close out their positions or fulfill the contract’s terms by taking delivery of the underlying asset (for physical delivery contracts).

5. **Contract Price (Futures Price):**
– The futures price is the price at which the underlying asset will be bought or sold when the contract is executed. It is agreed upon at the initiation of the contract and is not necessarily the current market price.

6. **Long and Short Positions:**
– A trader taking a long position agrees to buy the underlying asset at the specified price on the future date. In contrast, a trader taking a short position agrees to sell the underlying asset at the specified price on the future date.

7. **Marking to Market:**
– Futures contracts are marked to market daily, meaning that the gains or losses on the contract are calculated each day based on the current market price. These gains or losses are settled daily.

8. **Margin Requirements:**
– To trade futures contracts, traders are required to deposit an initial margin, which is a fraction of the contract value. Margin serves as a performance bond to ensure that traders can meet potential losses.

9. **Clearinghouse:**
– A clearinghouse acts as an intermediary between the buyer and the seller, guaranteeing the fulfillment of futures contracts. It reduces counterparty risk by becoming the counterparty to both sides of a trade.

10. **Settlement:**
– Futures contracts can be settled in two ways: physical delivery or cash settlement. In physical delivery, the actual underlying asset is delivered to the buyer. In cash settlement, the contract is settled in cash based on the contract’s value at expiration.

Futures contracts are actively traded by a diverse group of participants, including hedgers, speculators, and arbitrageurs. They play a crucial role in providing price discovery, risk management, and liquidity to financial markets. The standardized nature of futures contracts and the presence of a clearinghouse contribute to the efficiency and transparency of futures markets.