Future Contracts is a standardized forward contracts to buy or sell a specific amount of a commodity,currency or financial instrument at an agreed price on a stipulated future date.This contracts fixes the price for buying and selling.
Multinational firms using future contracts to protect their trade (buy and sell) various commodities that are traded on various exchanges around the world. This contracts is agreed between buyer and seller. The underlying assets in a futures contracts could be commodities, stocks, currencies, Interest rates and bond.
Future Markets are suitable for that company who want to protect themselves from price volatility in different securities, as well as investors or speculators who try to profit from the change in price of an asset.
Transaction costs of futures should be lower and the exact date of receipt or payment of the currency does not have to be known, because the future contracts will not be closed out until the transactions take place.
The limitation of futures is the contracts can not be tailored to the users exact requirements and hedge inefficiencies are caused due contracts rounded off and for basis risk i.e. Basis = Spot Price – Future Price. Another limitation of futures is only a limited number of currencies are used in future contracts.