Futures are Exchange Traded Derivatives contract to buy or sell the underlying asset. It will be executed at the future date for the price agreed today.
Example: X and Y are entering into a Derivative contract to buy or sell Reliance share for Rs. 2700 to be executed 3 months from now. In Future contract, Profit and loss will be calculated based on the Mark-to-Market concept. Mark-to-Market is a concept through which profit and loss will be calculated based on the closing price of the underlying asset on daily basis.
Characteristics/Features of Futures:
1. Futures are Exchange Traded Derivatives
2. Highly standardized as the contract takes place through an electronic platform.
3. Both the parties will have to pay the initial margin.
4. Low risk of default as both the parties pay the initial margin.
5. Cash settlement takes place.
