A futures contract is an agreement traded on an exchange or contract market to buy, sell, or effect cash settlement based on the performance of an underlying interest.

Question

Options

• ATrue
• BFalse

• A
  75% (43)
• B
  25% (14)

Explanation

Option A is correct because this statement accurately captures the legal definition of a futures contract: a standardized, exchange-traded agreement that obligates parties to transact (buy, sell, or cash-settle) based on an underlying interest such as a commodity, financial instrument, or index at a predetermined future date and price.

Option B is wrong because there are no errors in the statement - every element of the definition holds true. Futures contracts are indeed exchange-traded (distinguishing them from forwards, which are OTC), and they do allow for cash settlement rather than physical delivery.

Memory tip: Think of futures as the "formal cousin" of a forward contract - same core idea (agree now, transact later), but traded on a regulated exchange and can settle in cash. If a question says "exchange-traded" + "buy/sell/cash settle" + "underlying interest," that's a textbook futures definition - always true.

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