In forex trading, the term future is used to indicate a specific date sometime in the future. In international finance, a future contract is a specific, legally binding agreement to sell or purchase something at a fixed price in a specified future time, between parties never known to each other. The main asset traded is normally a financial or commodity. Futures contracts are often entered into before assets are transferred, as a way to hedge risks from buying or selling an existing asset that is in low demand. This is known as future speculation.
Futures contracts can be traded as calls or puts. Calls give traders the right to purchase or sell an underlying asset (usually the stock) on or before a certain date, while putting give traders the right to sell an underlying asset (the currency) on or before a certain date, but cannot buy or sell an underlying asset. The underlying asset to be traded is referred to as the principal. Futures contracts can also be traded using derivatives, which are simply contracts for the difference between the price of an underlying asset and the strike price (or value) of the derivative. The various types of futures contracts are credit default swaps, interest rate swaps, swap agreements, forward contracts, swap reverse agreements, naked short sales, and commodity markets.
Futures contracts are normally traded on stock exchanges, over the counter bulletin boards, or through electronic mail. In electronic mail, brokers can post the contract and send confirmation messages to the trader. Traders can then electronically sign their orders and execute the contracts by either purchasing (selling) or selling (buying) the underlying securities. A futures contract has a number of potential uses, including hedging against fluctuations in market prices, as a means of controlling risk, as a vehicle for the initial investment, as a method of making money by trading in commodities, and as a means of tax deferral.