What is defined as a standardized agreement to buy or sell a specific quantity of a commodity at a predetermined price on a specified future date?

What is defined as a standardized agreement to buy or sell a specific quantity of a commodity at a predetermined price on a specified future date?

• A. A margin
• B. An option
• C. A futures contract
• D. A clearinghouse

Answer: (C)

A futures contract is defined as a standardized agreement to buy or sell a specific quantity of a commodity at a predetermined price on a specified future date. This type of contract allows traders to hedge against price fluctuations in commodities or to speculate on price changes. The standardization aspect means that contracts are set by the exchanges regarding quantity, quality, delivery time, and location, ensuring uniformity and ease of trading. The predetermined price, known as the contract price, is established at the time the deal is made, which means both parties are securing their positions regarding the future market price of the commodity. This predictability creates a mechanism for risk management and price discovery in the commodities market, benefiting producers and consumers alike. In this context, options, margin, and clearinghouses refer to different concepts within the realm of trading and investing. Options provide the right but not the obligation to buy or sell, margin pertains to the amount of money borrowed to trade, and a clearinghouse acts as an intermediary to facilitate the settlement of trades.

A futures contract is defined as a standardized agreement to buy or sell a specific quantity of a commodity at a predetermined price on a specified future date. This type of contract allows traders to hedge against price fluctuations in commodities or to speculate on price changes. The standardization aspect means that contracts are set by the exchanges regarding quantity, quality, delivery time, and location, ensuring uniformity and ease of trading.

The predetermined price, known as the contract price, is established at the time the deal is made, which means both parties are securing their positions regarding the future market price of the commodity. This predictability creates a mechanism for risk management and price discovery in the commodities market, benefiting producers and consumers alike.

In this context, options, margin, and clearinghouses refer to different concepts within the realm of trading and investing. Options provide the right but not the obligation to buy or sell, margin pertains to the amount of money borrowed to trade, and a clearinghouse acts as an intermediary to facilitate the settlement of trades.