Futures Contract

What is a futures contract?

A futures contract is a legally binding, standardized agreement to buy or sell a specific quantity of an asset — a commodity, a currency, a stock index, or an interest-rate product — at a predetermined price on a set future date. Unlike an over-the-counter CFD, futures are traded on regulated exchanges such as the CME (Chicago Mercantile Exchange) or ICE (Intercontinental Exchange), which standardize the contract size, expiry dates, and settlement terms for every trader.

How futures differ from the spot market

A futures price is agreed today for delivery or cash settlement at a future date, whereas the spot market prices the same asset for essentially immediate value. The difference between the spot price and the futures price — known as the basis — reflects interest rates, storage costs (for physical commodities), and expectations about where the market is heading.

Margin, expiry, and settlement

Futures are traded on margin: a trader posts a fraction of the contract’s total value as collateral and can be exposed to gains or losses far larger than that initial outlay, similar in spirit to leverage in forex or CFD trading. Every futures contract has an expiry date, after which it is settled — either by physical delivery of the underlying asset (common in commodities) or in cash (common in index and interest-rate futures). Most speculative traders close or roll their position before expiry to avoid taking physical delivery.

Who uses futures

Futures were originally developed so producers and buyers of physical goods — farmers, oil companies, airlines — could hedge against future price swings by locking in a price today. They are also widely used by speculators seeking leveraged exposure to a commodity, index, or currency, and by portfolio managers hedging broader market risk.

Quick recap

• A futures contract locks in a price today for an asset delivered or settled on a future date.
• Traded on regulated exchanges with standardized contract terms, unlike OTC CFDs.
• Futures require margin and carry a fixed expiry date, with settlement in cash or physical delivery.
• Used both for hedging by producers/buyers and for leveraged speculation.