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A futures contract is a contract between two parties to exchange (buy or sell) a specific asset for a price agreed today with purchase occurring at a specified future date.

The parties to a futures contract are the seller and the buyer.

The buyer undertakes to buy the asset at the agreed price upon expiry of the contract.

The seller undertakes to sell the asset at the agreed price upon expiry of the contract.

Specifications of futures contracts are the underlying asset, quantity of underlying assets per contract, expiry date and pre-agreed price.

Clients cannot perform or get delivery of underlying commodity under futures contracts settled by actual physical delivery of underlying commodity (physical delivery futures). For compulsory position closing rules click here.

Types of Futures Contracts

Supply futures

In a futures contract with physical delivery the buyer undertakes to buy and the seller undertakes to sell a standardized quantity of underlying asset upon expiry of contract term. The asset is delivered at the closing price of contract expiry date.

Settlement (without supply) futures

In a futures contract with cash settlement the buyer and the seller perform mutual settlements in cash only.

Be informed

Each futures contract has definite specifications determined by stock exchange. These are:

Underlying asset or instrument
Underlying asset or instrument
Type of settlement (physical delivery vs. cash settlement)
Contract size, i.e. quantity of underlying asset per contract
Expiry date
Delivery term
Minimum fluctuation (tick)
Point value

E.g.: a corn futures traded at the Chicago Mercantile Exchange gives the buyer the right to buy 5,000 bushels of corn. Delivery months are March, May, July, September and December. There are no contracts specifying other delivery months or quantity. Futures contracts are normally standardized to ensure substitution between contracts for similar commodities. Type of settlement, contract size and months are determined by stock exchange.

An important feature of futures contracts is their high liquidity enabling traders to buy or sell them any time. Modern technologies allow quotations to spread across the world in a split second and make stock exchanges accessible for both professional players and grassroots. This boosts market volumes with various groups of buyers or sellers always trading on the exchange.

If compared with futures contracts, forward contracts need counterparty’s consent for early settlement, while futures give investors the choice or either selling at current market price or waiting until expiry day.

Everyone has heard of purchase of futures contracts, also known as “going long”. However, few have ever heard of “short selling”. As it turns out, stock exchange regulations allow investors to sell futures contracts without having them on hand; this is short position. The short seller gains the right to deliver the commodity upon expiry at the price and under the terms specified in the contract. Many players prefer short selling to speculate on price falls when they can profit from buying pre-sold futures at a lower price and thus exit the market.

Now, some may find it hard to understand the essence of short selling because you sell something you don’t actually have. Why would anyone want to sell short futures contracts? To determine their sell price, if they believe that the market is going down and they will gain on buying the futures back at a lower price.

Whether trading is long or short, the profit or loss depends solely on the difference between buy and sell prices.

To get a better understanding of commodity futures, they can be grouped as follows:

Grains include wheat, corn, oats, soy beans, soy oil, soy meal
Meats include livestock, cattle, hogs
Metals include platinum, silver, iron, gold
Softs include coffee, cocoa, sugar, orange juice, cotton
Foreign currencies include Swiss Franc, British Pound, Japanese Yen, Canadian Dollar, Mexican Peso, Australian Dollar
Index futures include S&P 500 stock index, Dow Jones stock index, Nikkei 225 stock index, NASDAQ 100 stock index, USD stock index, DAX 30 German stock index, CAC 40 French stock index
Energy futures include crude oil, heating oil, gasoline, natural gas
Wood includes timber

Futures margin is a guarantee required of both the seller and the buyer to ensure fulfillment of contractual obligations. As a rule, stock exchanges determine margin caps for each futures contract. Initial margin is required to open a position under a futures contract, whereas maintenance margin is required to maintain (keep open) the position. Usually maintenance margin makes about 75% of initial margin. Depending on market conditions, though, it can be changed by both stock exchange and broker.

Both commodity and financial futures can be used to hedge against market risks or speculate on prices. The main types of futures traders are hedgers, speculators and spreaders.

The main purpose of hedgers is to reduce risks.
Speculators seek big gain from selling and buying.
Spreaders profit from price difference between two futures contracts.

F	January	N	July
G	February	Q	August
H	March	U	September
J	April	V	October
K	May	X	November
M	June	Z	December

Updated on 14.04.2022 10:16