Futures

A futures contract is a standardised agreement to buy or sell a specified underlying exposure on terms the exchange sets. Those terms cover the underlying, the contract unit or multiplier, the minimum price fluctuation, the expiration cycle, the settlement method, the trading hours and, where they apply, the delivery terms.

The specifications are standardised. The price is not: it moves continuously as participants trade. Reading the specification is what tells you what one contract represents, and it is published by the exchange for every contract.

Standardisation is what makes centralised trading and clearing possible, because every contract in a series is interchangeable with every other. It also means a participant cannot adjust the multiplier or the delivery terms to suit a position. Different exposure means a different contract, or a different number of them.

Some heavily traded markets offer smaller variants. CME Micro E-mini equity index futures, for example, carry one tenth the multiplier of the corresponding E-mini contract. A smaller contract can allow more precise sizing for a smaller account. Which contract fits a given account is a question the specification answers, and it has to be checked per contract rather than assumed from the pattern.

A futures position does not continue indefinitely. Each contract expires, and as expiration approaches trading activity often migrates from the expiring contract into a later one. The timing of that migration varies by market, and depends on the product, the expiration cycle, volume, open interest and participant behaviour.

Settlement works one of two broad ways. A cash-settled contract is financially settled against the contract's final settlement procedure, and no physical asset changes hands. A physically deliverable contract provides for delivery of the underlying under exchange rules.

Physically deliverable contracts can create delivery obligations if held into the relevant process. In practice many retail brokers impose earlier close-out deadlines or prevent clients from entering delivery at all, so the operative deadline is often the broker's rather than the exchange's.

For some physically delivered contracts the important operational date falls before final expiration. First notice day and last trading day are the two to know for the specific contract, and they are published in its specification. Among the contracts covered here that matters most for the metals and energy products.

Holding a view past an expiration means rolling: closing the expiring contract and opening a later one. The two trade at different prices, and the shape of that difference has names. Contango is later-dated contracts trading above nearer-dated ones. Backwardation is later-dated contracts trading below.

The gap between two contracts is not by itself a realised loss or profit on the roll. What a rolling position actually earns depends on how prices evolve, the shape of the curve and how it changes, when the roll happens, the strategy, transaction costs and how prices converge into expiration.

The accurate statement is narrower than the folklore: for strategies that maintain continuous exposure by repeatedly rolling, the shape and evolution of the curve can materially affect long-run returns. Contango does not mean every roll loses, and backwardation does not mean every roll pays.

Futures and spot prices are not necessarily the same before expiration, and that difference is commonly called basis. As expiration approaches, the futures price and the relevant settlement reference generally converge under the contract's settlement mechanics. That is the reason different expiration months trade at different prices at the same moment.

Exchange-traded futures carry centralised rules and clearing that differ from decentralised or fragmented markets. Contracts are standardised, volume is consolidated, and open interest is published.

Some futures markets use price limits, circuit breakers, trading halts, position limits or accountability levels. Which of these applies, and how, is contract-specific rather than uniform across the class.

Where a market becomes limit-locked, liquidity can disappear and a position may not be exitable at the intended price. This is the direct link back to planned risk: a stop distance is a plan, and an exchange-level restriction is one of the conditions under which the realised loss exceeds it.

A clearing organisation is interposed between counterparties, which reduces bilateral counterparty exposure and centralises the management of collateral and settlement. It changes where the risk sits rather than removing it.

Centralised trading also produces centralised data: traded volume, open interest and contract-specific prices. Spot foreign exchange is decentralised, so no single venue observes total global spot volume.