Futures Contract
A futures contract is a standardised, exchange-traded agreement to buy or sell an asset at a price fixed today, for delivery or cash settlement on a set future date. A clearing house stands between the two sides and collects margin.
Also called: futures · future · exchange-traded futures · futures market
A futures contract does the same basic job as a forward contract but in a standard form. The exchange sets the contract size, the delivery months, the last trading day, the delivery locations and the acceptable grades of the underlying. Standard terms mean that one contract is interchangeable with another, so positions can be opened and closed easily, and most are closed by an offsetting trade before expiry rather than by delivery.
Every trade is cleared. The clearing organisation becomes the buyer to every seller and the seller to every buyer (see central counterparty), so a trader's exposure is to the clearing house rather than to whoever was on the other side. To back that guarantee, traders post initial margin when they open a position, and gains and losses are settled in cash as prices move. A move against a position produces a margin call that must be met promptly.
Futures exist on commodities, interest rates, currencies, equity indices and crypto assets. The crypto market's dominant variant, perpetual futures, drops the expiry date altogether. For a business managing currency risk, futures remove bilateral credit risk and price transparently, but their fixed sizes and dates rarely match a real invoice, which is one reason companies often hedge with bank forwards instead.
In practice
Because losses are settled in cash as they occur, a futures hedge that will be right at maturity can still drain cash along the way. The hedger must fund the margin before the offsetting gain on the underlying arrives.
Example
A trader buys one futures contract covering 100 units of an asset at US$500, an exposure of US$50,000, and posts US$5,000 of initial margin. The price falls to US$480: the US$2,000 loss is taken from the margin account, and if the balance drops below the maintenance level the trader must top it up.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Futures Contract, with more detail and background.
Commonly confused with
| Term | How it differs |
|---|---|
| Forward contract | A forward is a private agreement with terms tailored to the parties and credit risk between them. A futures contract has exchange-set terms, is cleared centrally and is margined as prices move. |
See also
- Forward ContractA forward contract is an agreement to exchange one currency for another on a future date at a rate fixed today. It creates a binding obligation on both sides — which is what makes it useful for certainty and dangerous if the underlying payment never happens.
- DerivativeA derivative is a contract whose value comes from the price, rate or event it references, called the underlying. It lets parties take on or shed exposure to that underlying without buying or selling the underlying itself.
- Margin CallA margin call is a demand that a party to a leveraged position or derivative post more collateral, usually cash, because the position has moved against it or the required margin has risen. If the call is not met, the counterparty can close the position.
- Central CounterpartyA central counterparty is a clearing house that steps between the two sides of a trade, becoming the buyer to every seller and the seller to every buyer, so that each party's exposure is to the CCP rather than to the other.
- Perpetual FuturesPerpetual futures are futures-style contracts with no expiry date, mainly traded on crypto exchanges. Instead of converging with the spot price at maturity, their price is held near spot by periodic funding payments between holders of long and short positions.
- HedgingHedging is taking a position that gains when an existing exposure loses, so that a move in a price, rate or currency leaves the combined result roughly unchanged. A hedge reduces uncertainty; it does not guarantee a profit or rule out a loss.