Options & derivatives
Futures contract
A standardised, exchange-traded agreement to buy or sell something at a set price on a future date.
How it works
Unlike options, a future is an obligation on both sides. Gains and losses are settled daily through margin, so losses are realised as they occur rather than at expiry.
Futures are the main tool for hedging commodity and currency exposure, and the main route to commodity exposure for funds.
Where it misleads people
Daily margining means a position can be closed out by a margin call before the view has time to be right. Futures do not let you sit through a drawdown the way an unleveraged holding does.
Related terms
- DerivativeA contract whose value comes from the price of something else.
- MarginBorrowing from your broker to buy more than your cash allows, using your portfolio as collateral.
- ContangoWhen futures prices further out are higher than nearer ones, so rolling a position costs money.
- BackwardationWhen futures prices further out are lower than nearer ones, so rolling earns money.
- HedgingTaking an offsetting position to reduce a specific risk you do not want.
Mentioned in
More in Options & derivatives
- Gamma
- Expiry
- Implied volatility
- In the money
- Delta
- Intrinsic value (options)
- Covered call
- Contract for difference
All 30 Options & derivatives terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.