Futures Contracts
Futures contracts are standardized financial agreements to buy or sell a specific asset at a predetermined price on a future date. These instruments play a vital role in price discovery, risk management, and market efficiency across commodities, financial instruments, and other underlying assets.
How futures contracts work
Futures contracts are exchange-traded derivatives that create an obligation between two parties. The buyer agrees to purchase the underlying asset at expiration, while the seller commits to deliver it. Key standardized elements include:
- Contract size
- Delivery specifications
- Expiration dates
- Price increments (tick size)
- Quality standards (for physical delivery)
Market structure and trading
Futures trading occurs on regulated exchanges through central counterparty clearing. This structure provides:
Futures Clearing Merchants (FCMs) facilitate access to markets and manage client margin requirements.
Price discovery and market efficiency
Futures markets contribute to price discovery through:
- Forward price curves
- Spot-futures arbitrage
- Market depth and liquidity
- Continuous price formation
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Trading and risk considerations
Margin requirements
Futures positions require:
- Initial margin for new positions
- Maintenance margin to keep positions open
- Daily mark-to-market settlement
- Variation margin for losses
Risk management applications
Common uses include:
- Hedging physical positions
- Portfolio risk management
- Cross-asset trading strategies
- Market access and exposure
Market data and analytics
Traders rely on:
- Real-time market data
- Order book analysis
- Volume profiles
- Price-time priority matching
Regulatory framework
Futures markets operate under comprehensive regulatory oversight:
- Exchange rules and specifications
- Clearing house requirements
- Position limits and reporting
- Market surveillance systems
Technology infrastructure
Modern futures trading requires:
- Low-latency connectivity
- Direct Market Access (DMA)
- Risk controls and monitoring
- Order Management Systems (OMS)
The infrastructure must support:
- High message throughput
- Microsecond response times
- Real-time risk checks
- Market data processing
Market participants
Key players include:
- Hedgers (commercial users)
- Speculators
- Market makers
- Institutional investors
- Algorithmic traders
Each participant type contributes to market liquidity and price discovery while serving different economic functions.