A future is a standardised agreement to buy or sell an asset at a set price on a set future date. Unlike an option, both sides are obligated to transact — so the payoff is linear, with no “walk away” floor.
How they’re standardised
Everything about an exchange-traded future is fixed except the price:
- Contract size — e.g. one crude-oil future = 1,000 barrels.
- Expiry dates — specific months.
- Quality/delivery terms — defined by the exchange.
Standardisation is what makes futures liquid and tradable by anyone.
The clearinghouse removes counterparty risk
When you trade a future, a clearinghouse steps between buyer and seller and guarantees the trade. So unlike a private forward, you’re not exposed to the other party defaulting — you face the clearinghouse, which manages the risk with margin.
Margin and daily settlement
You don’t pay the full contract value up front. You post margin — a good-faith deposit — and the position is marked to market daily:
- Each day, gains are credited and losses debited to your margin account.
- If your balance falls below the maintenance margin, you get a margin call to top up.
This daily settlement is the big mechanical difference from options and forwards.
Contango and backwardation
The futures price for later months usually differs from the spot price:
- Contango — later futures are more expensive than spot (normal for storable goods, reflecting carrying costs).
- Backwardation — later futures are cheaper than spot (often signals tight supply now).
Why people use them
- Hedging — a farmer locks in a crop price; an airline locks in fuel costs.
- Speculation — a leveraged bet on the direction of an index, commodity, or rate.
- Efficiency — deep, liquid markets with low costs.
Futures are linear and obligatory, so they don’t bend risk the way options do — but for locking in a price or expressing a clean directional view with leverage, they’re the standard tool.