What is a futures contract?
Futures contract means an agreement to buy or sell the underlying security on a future date. Such agreements are legally binding in nature.
Specifications regarding the delivery, time and place of settlement, quantity, quality in case of commodities are decided beforehand in the contract itself. Futures can be settled by delivery of the underlying security – cash or asset as the case may be. E.g: In case of a commodity – by delivery of that commodity on which contract was made.
The date decided beforehand for settlement on which contract expires is called as “the expiry date of the contract”.
Cash settlement means paying or receiving the difference between the price at which the contract was entered and the price of the underlying asset at the time of expiry of the contract.
As a result, a person may face profit or loss depending on the difference of price between period as mentioned above.