Usually, physical quantities of the commodities handled on the commodity exchanges are enough to balance out a marginal and temporary excess of either demand or supply. In this way the major commodity exchanges tend to set the market prices for their products all over the world. Unlike options, futures are binding contracts and may therefore entail a potentially unlimited loss. By fixing the price of the underlying commodity in advance, futures enable users and producers to hedge against spot price fluctuations, which on commodity exchanges tend to be very high. And for hedging to be possible there must be speculators willing to offer these contracts, thus helping to make an active market.
Futures are negotiable instruments.
The goods are represented by documents. The settlement of money differences, i.e. the difference between the price of the original and the price of the offsetting futures contract, is usually made through a clearing house. The most widely traded commodity futures in the world are based on oil. Under this contract the seller undertakes to provide the client with a fixed amount of a commodity on a fixed future date at a fixed price. The holder will only exercise his option, if the price of the underlying commodity moves favourably, by an amount sufficient to provide a profit when the option is sold.