Futures Contract: standardised exchange agreement explained
By Ken Chigbo, Founder, KenMacro. Published 2026-05-13.
Quick answer
A futures contract is a standardised, exchange traded agreement obliging the buyer to purchase, and the seller to deliver, a specified quantity of an underlying asset at a fixed price on a set future date. Contracts are guaranteed by a clearing house, margined daily, and trade on regulated venues such as the CME.
What is futures contract?
A futures contract is a legally binding agreement traded on a regulated exchange that locks in the price today for the delivery of an underlying asset at a defined point in the future. Each contract specifies the asset, contract size, tick value, delivery month, and settlement method, whether physical or cash. Unlike a bilateral forward, a futures contract is standardised by the exchange and novated to a central clearing house, which becomes the counterparty to both sides. This structure removes bilateral credit risk and enables daily mark to market settlement through margin accounts held with clearing brokers.
How traders use futures contract
Retail traders typically use futures to gain leveraged, transparent exposure to indices, commodities, currencies, and rates without an over the counter broker. Common venues include the CME for equity index, FX, and energy contracts, ICE for softs and Brent, and Eurex for European rates. Each position requires posting initial margin and meeting variation margin calls as the contract is marked to market at the daily settlement price. Institutional desks use futures to hedge cash exposures, express macro views around scheduled releases such as FOMC and CPI, and arbitrage against ETFs, swaps, and the underlying spot market. Liquidity is concentrated in the front month, and traders roll positions to the next expiry before first notice or last trading day to avoid delivery obligations.
Common misconceptions about futures contracts
Many retail traders assume futures behave identically to spot or CFDs, but several structural differences matter. Futures have fixed expiries, so positions must be rolled or closed; they do not run indefinitely. Pricing reflects cost of carry, meaning the futures price typically differs from spot by financing, dividends, storage, or convenience yield. Leverage is a function of exchange set initial margin rather than a broker chosen ratio, and margin requirements can change without notice during volatile periods. Finally, holding into expiry can trigger physical delivery on contracts such as crude oil, an outcome retail accounts are usually not equipped to handle.
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Frequently asked
What is the difference between a futures contract and a forward contract?
A forward is a bilateral, customisable agreement negotiated directly between two counterparties, typically over the counter, with settlement at maturity and full bilateral credit exposure. A futures contract is standardised by an exchange, cleared through a central counterparty, and marked to market daily through margin. Futures offer transparent pricing, deep liquidity, and removal of bilateral default risk, whereas forwards offer bespoke terms but carry counterparty risk and limited secondary market liquidity.
How is a futures contract settled?
Settlement depends on the contract specification. Physically settled futures, such as WTI crude or many agricultural contracts, require the seller to deliver the underlying commodity to a designated location if held to expiry. Cash settled futures, such as equity index and most short term interest rate contracts, are closed at a final settlement price with the difference paid in cash. Most retail and speculative traders close or roll positions before first notice day to avoid the delivery process entirely.
What is margin in a futures contract?
Margin is the performance bond posted with the clearing broker to cover potential losses. Initial margin is the amount required to open a position, set by the exchange based on contract volatility. Variation margin reflects daily profit or loss as the position is marked to market against the settlement price. If the account falls below maintenance margin, the broker issues a margin call requiring additional funds or position reduction. Margin is not a down payment; it is collateral against adverse moves.
Why do futures prices differ from spot prices?
The gap between futures and spot, known as the basis, reflects cost of carry. For financial assets, this includes financing rates minus any income such as dividends or coupons. For commodities, it also incorporates storage costs, insurance, and convenience yield, which is the benefit of holding the physical good. A market in contango shows futures trading above spot, while backwardation shows futures below spot, often signalling tight near term supply or strong immediate demand.
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