What does a futures contract create?

What does a futures contract create?

• A. The obligation to deliver or take delivery of a specific quantity and quality of a commodity at a specified time in the future
• B. The option to buy a commodity at a specified price
• C. The right to sell a commodity at any price
• D. A guarantee of profit

Answer: (A)

A futures contract creates a binding obligation to exchange a specified quantity and quality of a commodity at a set future date. This means the seller is obligated to deliver and the buyer is obligated to take delivery (or settle) the agreed-upon underlying when the contract matures, regardless of how market prices have moved in the meantime. The contract is standardized and traded on an exchange, with margin and daily settlement to manage risk, and many traders offset their position before delivery rather than actually delivering. This is different from an option, which grants a right without requiring action, and it does not guarantee profit—price movements can lead to losses as well as gains.

A futures contract creates a binding obligation to exchange a specified quantity and quality of a commodity at a set future date. This means the seller is obligated to deliver and the buyer is obligated to take delivery (or settle) the agreed-upon underlying when the contract matures, regardless of how market prices have moved in the meantime. The contract is standardized and traded on an exchange, with margin and daily settlement to manage risk, and many traders offset their position before delivery rather than actually delivering. This is different from an option, which grants a right without requiring action, and it does not guarantee profit—price movements can lead to losses as well as gains.