What is a futures contract
A futures contract is a standardised agreement, traded on an exchange, to buy or sell a set amount of an asset at a price fixed today, for settlement on a set future date.
It is a derivative. Its value comes from an underlying asset such as a commodity, a stock index, a currency or a bond.
Formal definition
A futures contract is an exchange-listed forward contract with fixed terms. The exchange sets the contract size, the tick size, the expiry date and the settlement method. A central counterparty stands between buyer and seller. Gains and losses are settled every day against the exchange settlement price, which is called mark-to-market.
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Futures contract example (hypothetical)
A trader buys a gold futures contract that expires in a later month.
- Opening. The trader does not pay the full value. They post initial margin, which is a deposit held as collateral.
- Daily settlement. At the end of each day, the clearing house compares that day's settlement price with the previous one. If the price rises, the gain is credited to the buyer and the same amount is debited from the seller. If the price falls, the opposite happens.
- Margin call. If losses push the account below the maintenance margin level, the trader must add funds or the position can be closed.
- Exit. The trader closes the position before expiry or holds it to settlement.
Result of the trade:
| Item | Formula |
|---|---|
| Profit or loss | (exit price − entry price) × contract size × number of contracts |
| Value of a price step | tick size × contract size |
Because margin is only a small part of the contract value, a small price move changes account equity by a large amount. Leveraged futures and CFD trading can lose money fast, and losses can be larger than the first deposit. See risk management.
Where you see the term
- Contract specifications on exchanges and platforms: underlying asset, contract size, tick value, last trading day, and whether settlement is cash or physical delivery.
- Symbols: futures tickers carry a month and year code, and the nearest one is the front month.
- News: phrases such as "crude futures fell" or "index futures point higher" refer to these exchange prices before or alongside the cash market.
- Price curves: contango and backwardation describe how prices for different expiry months relate to each other.
Edge cases for experienced traders
- Basis. This is the gap between the futures price and the spot price. It narrows towards expiry.
- Rolling. Holding exposure past expiry means closing the old contract and opening a later one. This is called a futures roll, and it can cost or earn the spread between the months.
- Physical delivery. Some contracts oblige delivery, so traders without that intent close or roll the position before the notice period.
- Price limits and halts. Exchanges can cap daily moves or pause trading. See circuit breaker.
- Futures vs CFD. A CFD on an index or commodity at a retail broker is a contract with that broker. It is not an exchange futures contract, even if the broker prices the CFD from futures.
Futures trading in Pakistan
In Pakistan the supervisor is the Securities and Exchange Commission of Pakistan (SECP), with trading in listed securities and commodities only via SECP-licensed securities and futures brokers. Under the under the Futures Market Act 2016, s.47(1), no one may carry on a regulated activity (futures broker, adviser, representative) without an SECP licence. Also, per the SECP, lists of licensed brokers are on the PSX and PMEX websites. For more context, see regulation and safety.
Frequent questions
What is the futures contract meaning in simple words?
It is an exchange-traded promise to buy or sell an asset later at a price agreed now, with fixed standard terms.
How is a futures contract different from a forward?
A forward is private and custom-made. A futures contract is standardised, cleared by a central counterparty and settled daily.
Do I have to take delivery of the asset?
Only with physically settled contracts held into delivery. Most traders close or roll their positions before that point, and cash-settled contracts never deliver the asset.
Can losses exceed my margin?
Yes. A sharp price move can create losses larger than the margin posted.
More terms are in the trading glossary.