(FINANCE) a
financial derivative that consists of a contract to buy a fixed amount of a thing at a fixed price at a fixed time in the future,. For example, a commodity future may specify 1000 British barrels (bbl) of West Texas Intermediate (
WTI) crude oil for $85.75/bbl, for delivery at
Cushing, OK, on 31 November 2010.
Futures are "written" by the person with the commodity to sell, and sold to either a financial
speculator or else to someone who wants the product--in this case, an oil refinery. Sellers/owners do this because they want to be assured of a fixed price for the thing they're selling. The official reason for buying a future is to get a fixed price for something. This allows businesses to plan ahead.
However, since futures contracts are traded on secondary markets, it's possible to make (or lose) a lot of money trading them.
SOMEBODY: A futures contract can be extremely valuable for doing business. One of the best examples was
Southwest Airlines, which weathered the oil crisis of 2007-2008 with futures for aviation fuel. When the
market price of fuel doubled, Southwest was able pay a low, low contract price.
SOMEBODY ELSE: Doesn't it ever backfire?
SOMEBODY: Yes, the market price could
fall through the floor and you'd be stuck paying THAT instead of the new, lower price. But at least you know what your cash flow will be.
