How Futures Contracts Work

A futures contract is an agreement to buy or sell a defined quantity of an underlying — a barrel of oil, a bushel of corn, an equity index — at a set price on a future date. Standardised and exchange-traded, futures are the workhorse of commodity and financial risk transfer.

Long, short and mark-to-market

Every contract has two sides. The long agrees to buy and profits if the price rises; the short agrees to sell and profits if it falls. Positions are marked to market daily: gains and losses are settled every day through the clearing house, so profit or loss accrues continuously rather than only at expiry.

Margin — leverage and its cost

You don’t pay the full contract value. Instead you post initial margin (often only ~3–12% of notional) as a good-faith deposit, and must keep your balance above a maintenance margin level. If losses erode it, you get a margin call for more cash. This leverage makes futures capital-efficient — but it is also why liquidity risk and margin funding matter so much (see Liquidity & Funding).

Turning a futures position into a hedge

Used on their own, futures are directional bets. Used against an existing exposure, they reduce risk: a producer who will sell oil later can short oil futures today, locking in a price — losses on falling physical barrels are offset by gains on the short. That is the essence of hedging, explored further in Hedging & Derivatives.

Sources & further reading

• Margin: Know What’s Needed (Introduction to Futures) — CME Group
• The Benefits of Futures Margins — CME Group
• Hedging with E-mini S&P 500 Futures — CME Group