Read from wiki
http://en.wikipedia.org/wiki/Futures_contract
A futures contract gives the holder the obligation to buy or sell, which differs from an options contract, which gives the holder the right, but not the obligation. In other words, the owner of an options contract may exercise the contract. Both parties of a "futures contract" must fulfill the contract on the settlement date. The seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset his position by either selling a long position or buying back a short position, effectively closing out the futures position and its contract obligations.
Standardization
Futures contracts ensure their liquidity by being highly standardized, usually by specifying:
- The underlying asset or instrument. This could be anything from a barrel of crude oil to a short term interest rate.
- The type of settlement, either cash settlement or physical settlement.
- The amount and units of the underlying asset per contract. This can be the notional amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of the deposit over which the short term interest rate is traded, etc.
- The currency in which the futures contract is quoted.
- The grade of the deliverable. In the case of bonds, this specifies which bonds can be delivered. In the case of physical commodities, this specifies not only the quality of the underlying goods but also the manner and location of delivery. For example, the NYMEX Light Sweet Crude Oil contract specifies the acceptable sulfur content and API specific gravity, as well as the location where delivery must be made.
- The delivery month.
- The last trading date.
- Other details such as the commodity tick, the minimum permissible price fluctuation.
