Future is a well set process to buy and sell commodity of a quality on a particular date at predefined price. The contracts are traded on future exchange . Future contracts is like direct securities like stocks , bonds rights and warrants. The derivative contract still in the form of security is called the future option. The contract is decided based on the requirements of supply and demand in the market. Traditional commodities are future contracts for financial future. Financial instruments which is intangible asset, or referred to as stock indexes and interests is referred to as currency.
Final settlement date is nothing but the delivery date of the future.The price of the future contract and at the end of the days trading session is called the settlement price for the day of business on the exchange Under the terms of the future contract the holder is obligated to make or take delivery whereas in an option gives the buyer the right to come to a position which was previously held by the seller of the option. Both parties have the obligation to fulfil the contractual obligation of the settlement date. The asset is delivered to the buyer in case it is a cash settled futures contract. The cash under these cases is transferred from the future trader to the one w To exit the commitment ho made a profit. Prior to the settlement date the holder of the future options has to offset his position by either selling a long position or buying back short position which would effectively close the future option and its contract obligation.
ETF’s are also known as future contracts. The clearing house of the exchange acts as a counter party on all contract which sets margin requirements and crucial mechanism for settlement.
On a future date the asset would be delivered at a pre agreed price in case of future and forward contract. The only difference is future are exchange traded and forwards are traded over the counter. Futures and forwards have another small difference which is that futures are standardised and forwards are customised one faces an exchange and the other one does not.