A futures contract is a standardized, exchange-traded derivative in which long and short positions take opposite obligations tied to a specified commodity, financial instrument, index or other defined reference for a future contract month. The exchange fixes the contract specifications in advance, while market participants choose whether to be long or short, how many contracts to trade and the price at which they transact. Depending on the contract, final settlement occurs through physical delivery or a cash payment.
Standardization changes who you are really trading with
Once a futures trade is accepted for clearing, the clearing organization becomes the central counterparty—buyer to the seller and seller to the buyer. The original buyer and seller are therefore not left with a continuing bilateral credit relationship. This clearing structure, combined with standardized contract terms, makes positions fungible enough to offset: a trader can normally close a long by selling the same contract, or close a short by buying it, without locating the original counterparty.
Margin is collateral, not the purchase price
The economic exposure of a futures position can be much larger than the cash posted to support it. Futures margin functions as a performance bond rather than a down payment, and open positions are marked to market using settlement prices. Gains and losses are credited or debited as prices move. That means notional exposure and margin are different quantities, and it also creates an important liquidity consequence: a position that later recovers can still require additional cash after adverse interim moves.
If a position remains open into a contract’s delivery or final-settlement process, the contract’s own rules determine what happens next. Cash-settled contracts are resolved financially; in physically deliverable contracts, open positions can incur obligations to make or take delivery during the delivery period. The relevant notice, last-trading, delivery and settlement dates are contract-specific and should not be collapsed into a generic notion of “expiration.” That is why traders need the exact contract specifications when carrying a position late in its life. A futures contract is best understood as a standardized, centrally cleared mechanism for transferring price risk through time—not as a prediction of where the spot price must be when the contract matures.