What does a futures contract specify about the commodity?

A futures contract is a legally binding agreement that defines the terms for the buying and selling of a commodity at a specified price on a predetermined future date. This structure allows both parties to hedge against price fluctuations in the market. By setting the price in advance, the parties involved gain certainty about costs and potential profits or losses, which is especially important in the commodities market where prices can be volatile.

This contract is fundamental for risk management, enabling producers and consumers to navigate the uncertainties of future commodity pricing. It is crucial to understand that while futures contracts are often traded on exchanges, they do not imply any obligation to buy or sell the actual commodity in its physical form, as the contract can be settled financially.