Final answer:
A futures contract is a financial tool used to hedge against price fluctuations by setting the price of an asset for future trade, ensuring stability in business transactions despite market volatility.
Step-by-step explanation:
A futures contract is a financial agreement where two parties agree to buy or sell a specific quantity of a commodity, asset, or financial instrument at a predetermined price at a specified time in the future. It is typically used by businesses to hedge against the risk of price fluctuations. For example, a U.S. firm exporting to France might receive payment in euros a year from now; to avoid the risk of currency exchange rate fluctuations between the dollar and the euro, they might use a futures contract to set the exchange rate in advance. This ensures the firm knows exactly what the contract will be worth in U.S. dollars regardless of market volatility. Financial institutions or brokerage companies usually facilitate these contracts and may charge a fee or create a spread in the exchange rate as a service charge.