Glossary
Futures contract
A standardized exchange-traded agreement to buy or sell an asset at a set price on a future date, marked to market daily.
A futures contract is a standardized agreement, traded on an exchange, to buy or sell a set quantity of an asset at a price agreed today for settlement on a specific later date. Underlyings range from crude oil, corn and gold to Treasury bonds, currencies and stock indexes. Futures let producers and investors lock in prices or hedge exposure, and let traders take large positions with a small deposit, which makes them powerful and risky in equal measure.
How it works
Every contract specifies the underlying, the contract size, the tick value, the expiration months and whether it settles by physical delivery or in cash. A clearinghouse stands between buyer and seller, so neither side depends on the other's credit. Each side posts initial margin, a good-faith deposit set by the exchange, and the account is marked to market every day: gains are credited and losses debited in cash. If the balance falls below the maintenance level, the trader must add funds.
Futures versus options and forwards
A futures position obliges both sides to perform, unlike an option, which gives the buyer a right without an obligation. A forward is a similar agreement negotiated privately, without the exchange's standardization, daily settlement or central clearing.
What to keep in mind
Most traders close or roll positions before expiry rather than take delivery. Futures prices differ from spot prices by the cost of carry, so curves can be in contango or backwardation. In the US, futures are regulated by the CFTC, not the SEC, and trade nearly around the clock on weekdays.