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Futuresbeginner

Futures Contract Basics

A futures contract is a standardised agreement to buy or sell a specified quantity of an asset at a fixed price on a defined future date. Contracts trade on organised exchanges such as ASX 24 or CME, are guaranteed by a central counterparty, and are marked to market daily so gains and losses settle in cash rather than accumulating to expiry. Standardisation covers contract size, quality, delivery date, and tick size, which is what makes futures fungible and liquid in a way bilateral forwards are not.

Why it matters

Think of a futures contract as a queued trade. You and an unknown counterparty agree today on a price for a future transaction in a specific contract, say the June ASX SPI 200 futures, and the clearing house steps between you to remove credit risk. Each evening the exchange reprices the contract at the settlement price and moves cash between margin accounts to reflect the day's profit or loss. By the time delivery arrives, all profit and loss has already been paid out. The economic gain comes from the price path, not from a single cheque at maturity.

Formulas

No-arbitrage futures price (continuous)
F0=S0e(r−q)TF_0 = S_0 e^{(r - q) T}
Spot S0S_0, risk-free rate rr, income yield qq, time TT. Hull (2022) §5.4 derives this from cash-and-carry arbitrage.
Notional exposure
Notional=F0×contract multiplier\text{Notional} = F_0 \times \text{contract multiplier}

Worked examples

Scenario

A trader goes long one June ASX SPI 200 futures at 7,500 index points. The contract multiplier is A$25 per point.

Solution

Notional exposure =7,500×25== 7{,}500 \times 25 = A$187,500. Initial margin posted is roughly A$12,000 to A$15,000 depending on the ASX Clear (Futures) SPAN scan, so the position is leveraged about $12$ to $15$ times. The trader profits from any rise in the SPI 200 settlement price and loses from any fall, with cash moving through the margin account each day.

Scenario

A Queensland sugar producer sells five ICE No. 11 sugar futures expiring in October at 22.50 cents per pound, contract size 112,000 lb.

Solution

Each contract has notional =0.2250×112,000== 0.2250 \times 112{,}000 = US$25,200, total exposure US$126,000. The producer has locked in revenue at 22.50 c/lb on this volume. If October spot sugar settles at 20.00 c/lb, the short futures position gains $2.50 \times 112{,}000 \times 5 / 100 =$ US$14,000, offsetting the lower physical price.

Common mistakes

  • ✗Futures prices forecast the expected future spot price. They do not. The no-arbitrage futures price equals the spot plus the cost of carry, F0=S0e(r−q)TF_0 = S_0 e^{(r-q)T}, which is a pricing identity. Any forecast component sits in the spot price already.
  • ✗You must hold a futures position until delivery. In practice, the CFTC Commitments of Traders data and exchange statistics show that fewer than five per cent of contracts go to physical or final cash settlement. Most positions are closed out by an offsetting trade before the last trading day.
  • ✗Futures and forwards are interchangeable. Daily marking to market changes the cash-flow timing, so futures prices differ slightly from forward prices when interest rates are correlated with the underlying, as shown in Hull (2022) §5.8.

Revision bullets

  • •Standardised exchange-traded contracts with central clearing
  • •Obligation to buy or sell, not an option
  • •Daily mark-to-market settles gains and losses in cash
  • •Expiry by physical delivery or cash settlement
  • •Fair price set by F0=S0e(r−q)TF_0 = S_0 e^{(r-q)T} under no-arbitrage
  • •Most positions are closed out before expiry

Quick check

A futures contract differs from a forward primarily because futures are:

One ASX SPI 200 futures contract trades at 7,200 with a contract multiplier of A$25. The notional exposure is:

Connected topics

Long/ShortPayoffCost of CarryConvergence

In learning paths

Futures Path

Sources

  1. Hull (2022), Ch. 2
    Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.
    Chapter 2 introduces futures markets, contract specification, the role of the clearing house, and the difference between futures and forwards.
  2. ASX SPI 200 contract specs
    Australian Securities Exchange. ASX SPI 200 Index Futures and ASX Mini SPI 200 Brochure. ASX, 2023.
    Local benchmark equity-index futures contract. Specifies the A$25 multiplier, one-index-point tick, and quarterly expiry cycle used in the example.
  3. CME Group, Introduction to Futures
    CME Group. Introduction to Futures: A Guide to the Mechanics. CME Group Education, 2024.
    Plain-English explanation of standardisation, central clearing, daily settlement, and how contracts are closed out before expiry on US exchanges.
  4. RBA, ASX Clear (Futures) Assessment
    Reserve Bank of Australia. Assessment of ASX Clearing and Settlement Facilities, Appendix B: ASX Clear (Futures). RBA, 2022.
    Authoritative description of how the Australian central counterparty manages futures positions, initial margin, and daily variation margin.
How to cite this page
Dr. Phil's Quant Lab. (2026). Futures Contract Basics. Derivatives Atlas. https://phucnguyenvan.com/concept/futures-basics
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