A futures contract locks in the price of a future transaction today. Contract parameters — volume, quality of the underlying asset, execution date — are standardized by the exchange, making contracts interchangeable and allowing free trading.
Execution can be physical delivery, when the asset is actually transferred, or cash settlement, when parties exchange only the difference between the contract price and market price on the execution date. Most exchange contracts are closed before maturity through an offsetting transaction.
Participants use futures for two different purposes. Hedging — fixing the price of future purchase or sale to eliminate uncertainty: a producer locks in the selling price in advance, a consumer locks in the purchase price. Speculation — extracting profit from price changes.
A key feature is margin requirement: only part of the position's value is deposited to open it, creating a leverage effect. Profit and loss are calculated from the full contract size, and in case of unfavorable price movement, additional margin is required. For an investor without experience with derivatives, this is a significant source of risk.