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Definition: Futures

Futures or future contract is a standardized contract between two parties to exchange a commodity/asset at a decided price (strike price) at a specific time in future. These contracts are standardized contracts and are traded on the stock market. These are also settled on a daily basis. In other words, they are marked to market daily.

Future contracts are often for hedging purposed to protect against the volatility in the prices of the underlying commodity.

At the end of the contract period, the commodity may be exchanged or there may be a cash settlement.

For example, 2 parties enter into a future contract to exchange a commodity for Rs.1000. The contract ends on April 10,2012. If the price of the commodity on April 10, 2012 is Rs. 1100, the seller can either exchange the commodity or do cash settlement of Rs.100 (1100-1000).

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