Question

What are futures contracts? How do organizations account for futures transactions?

Answer 1

Future contracts are normally of two types that is one which settle with physical article are know as future contracts for commodity and one which settle in cash are known as Financial contracts.

The example of future contract for commodity are wheat or tea or coffee and example of financial contracts are shares,equities and bonds.

Now a days future contracts are normally considered as a forward contract which happens to be executed at a future specified date and at a predetermined price and parties may or may not known to each other.

Organizations needs to accounts all the future contract very specifically for their premium which they have paid for the each of such contract or in case of if it is for the shares and equities then in that case initial margin money and mark to market which is known as "M to M", needs to be accounted.

But in a normal trade parlance, future contract accounts only at a future date when the contracts needs to be executed.