What is a commodity futures contract?

• A. A contract to insure against price swings
• B. An agreement to buy or sell a particular commodity at a predetermined place and dates
• C. A loan secured by commodity assets
• D. A free-trade agreement for commodities

Answer: (B)

A commodity futures contract is a standardized agreement to buy or sell a specific quantity of a commodity at a predetermined price on a specified future date and at a designated delivery location. It’s traded on futures exchanges, so the terms—such as quantity, quality, delivery point, and delivery date—are fixed in advance. This setup lets producers, buyers, and traders hedge against price changes; they can lock in prices now for future delivery, or speculate on price movements. Some contracts are settled with physical delivery, while others are cash-settled or offset by taking the opposite position before expiration. This concept is different from insurance, loans, or trade agreements, which is why the described choice best captures what a commodity futures contract is.