A futures contract is an agreement that requires a party to the agree- ment either to buy or sell something at a designated future date at a pre- determined price. The something that the two parties agree will be bought and sold is referred to as the underlying for the contract or sim- ply the underlying. The basic economic function of futures markets is to provide an opportunity for market participants to hedge against the risk of adverse price movements.
Futures contracts are products created by exchanges. Futures con- tracts involving traditional agricultural commodities (such as grain and livestock), imported foodstuffs (such as coffee, cocoa, and sugar), or industrial commodities are traded. Collectively, such futures contracts are known as commodity futures. Futures contracts based on a financial instrument or a financial index are known as financial futures. Finan- cial futures can be classified as (1) stock index futures, (2) interest rate futures, and (3) currency futures.
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