Futures markets are designed to solve the problems that exist in forward markets. A future contracts agreement between two parties to buy or sell an asset at a certain time in future at a certain price. But unlike forward contracts, futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies standard features for the contract. It is a standardized contract with a standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered which can be used for reference purpose in settlement and a standard timing of such settle. A futures contract may be offset prior to maturity by entering into an equal and op transaction. The standardized items in a futures contract are: (i) Quantity of the underlying (ii) Quality of the underlying, (iii) The date month of delivery, (iv) The units of price quote and minimum price change and (v) Location of settlement. The distinction between forward future contracts are listed in Table.
Thus, future contracts are a significant improvement over forward contracts as they eliminate counterparty risk and offer more liquidity. This section illustrates future contracts with reference to (i) Futures terminology, (ii) Payoff for futures, (iii) Pricing futures, (iv) Issuing index futures and (v) Using futures on individual securities (stock futures).