A futures contract is a standardized derivative agreement under which a buyer, or long, and a seller, or short, take opposite positions tied to a specified underlying, contract size and maturity, at a futures price established when the trade is entered. For a physically settled contract carried into the delivery process, the short must be prepared to make delivery under the contract’s rules, while the long must be prepared to take delivery and pay the required delivery value. For a cash-settled contract, no physical delivery occurs; an open position is instead settled financially by reference to the contract’s final settlement procedure. In either case, a position can usually be closed beforehand through an offsetting transaction.
In an organized centrally cleared futures market, the originally matched buyer and seller do not remain exposed to each other as a standalone bilateral contract. At the clearing level, the clearinghouse stands between clearing participants as buyer to each clearing seller and seller to each clearing buyer. Together with standardized contract terms, this structure makes contracts for the same product and maturity fungible rather than dependent on the identity of the original trading counterparty.
The obligation is larger than the cash posted
Entering a futures position does not normally require paying the contract’s full notional value. Instead, futures positions are subject to applicable margin requirements. Margin is collateral supporting performance, not a down payment on the underlying asset and not a measure of the maximum possible loss. The economic exposure comes from the contract specification: contract size, quoted price, tick size, contract month and settlement method. Delivery obligations therefore depend on the particular contract and on whether the position remains open into the relevant delivery or final-settlement process.
Daily settlement changes the cash-flow path
A crucial feature of exchange-cleared futures is mark-to-market settlement. Open positions are revalued using settlement prices, and gains or losses are transferred through the clearing system. A futures position can therefore consume or release cash well before expiration. Two price paths that ultimately reach the same final settlement value can create very different interim funding demands. That consequence is easy to miss when a futures contract is described only as an agreement to transact later at a price fixed today.
Futures are used to transfer price risk and to take market exposure, but the contract itself does not reveal why a participant holds it. Nor should a futures price automatically be treated as a forecast of the future spot price: it is the current market-clearing price for a standardized exposure with a particular maturity and settlement structure. For research or trading, the exact contract specification matters. “One contract” can represent very different notional exposure, cash-flow behavior, expiry risk and delivery obligations across markets.