Futures contract is an agreement between two parties to sell or buy an asset in the future for a particular price. Contrary to alternative investment management products, futures contracts are usually traded on an exchange. To make the mechanism work, exchange indicates particular similar features of the contract. In most cases, two parties to the contract do not know each other however the exchange has a technology that gives the two parties a guarantee that the future contract will be exercised. Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME) have merged and formed the CME Group, which is the largest exchange on where futures contracts are traded. On exchanges all other the world, a very broad diapason of commodities and financial assets structure the underlying assets in the different contracts. The commodities consist of sugar, gold, aluminum, pork bellies, copper and etc. Meanwhile, the financial assets consist of currencies, treasury bonds and stock indices. It is always possible to find out futures prices in the press. Assume that, on November 1, the February futures price of gold is priced as $1190. If we exclude commissions, this is the price at which traders can accept to buy or sell gold for the February delivery. When there are more traders who want to go short than long, the price of gold goes down, and if the inverse is true, then the price goes up.
Futures markets are often used by speculators, who wish to take a position in the market. Speculators bet that the price of the asset will go up or down. Imagine a speculator who in October thinks that the Euro will weaken relative to the US dollar over the next month and is ready to back that suspicion to the amount of 100000 EUR. Speculator can purchase 100k EUR in the spot market and hope that Euro can be sold after one moth at a higher price. Another alternative investment management strategy is to take a long position in four Chicago Mercantile Exchange (CME) Nowember r future contracts (each contract worth €25000) on Euro. The second alternative is more attractive if investor does not have a huge amount of cash. It requires only a small amount of cash to be deposited by the speculator in what is called a margin account. The futures market allows the speculator to get leverage and take a larger position.
