What is the key characteristic of futures contracts?

• A. They are always risk-free investments
• B. Their value is determined by spot prices
• C. They are agreements to buy or sell an asset at a future date
• D. They can only be settled in cash

Answer: (C)

The key characteristic of futures contracts is that they are agreements to buy or sell an asset at a predetermined price at a specific point in the future. This unique feature allows participants to hedge against price fluctuations or speculate on price movements in various assets, such as commodities, currencies, or financial instruments. By locking in a price today for a transaction that will occur later, traders utilize futures contracts to manage risk and capitalize on anticipated market changes.

While aspects such as spot prices play a role in determining pricing dynamics in the market and cash settlement is an option in some contracts, the defining trait of futures is the commitment to execute a trade at a future date. This distinguishes them from other investment options and plays a critical role in trading strategies.