Market Research Glossary

Browse the glossary using this index

Special | A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z | ALL

F

Futures Contract

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.

Futures Term Structure

Futures term structure is the set of futures prices for the same underlying market across different contract months observed at the same point in time. The comparison is between contracts quoted using the same quotation convention and unit—for example, dollars per barrel, cents per bushel, index points or another market-specific quotation unit—while contract maturity is the dimension that changes. Often called the futures curve, it shows how the market prices delivery or settlement at different horizons. Curve slope is only one feature of that structure: the full curve can be upward sloping, downward sloping, flat, humped, seasonally patterned, or locally inverted. A calendar spread compares two maturities; the term structure is the broader cross-section from which those intermonth relationships are drawn.

What shapes prices across maturities

In storable commodity markets, differences between nearby and deferred prices can reflect financing, storage, insurance and the economic value of having inventory available now. Tight inventories can raise the convenience value of physical supply and support backwardation, while abundant inventories and carrying costs can support contango. Other futures markets have different carry mechanisms: interest-rate differentials matter in currency futures, for example, while seasonal supply-and-demand patterns can dominate parts of energy or agricultural curves. This is why contango and backwardation are useful labels but incomplete descriptions of the curve. A market can contain several distinct slopes or seasonal peaks within the same term structure.

A curve is not a forecast strip

The most important interpretation boundary is that a futures curve is not a strip of future spot prices or necessarily an unbiased forecast of them. Each point is a tradable price agreed today for a particular contract maturity. Hedging demand, carry, inventory conditions, arbitrage constraints and liquidity can all affect that price, and farther-dated contracts may contain less precise information when trading is thin. The curve can contain expectations about the future without being numerically identical to expected future spot prices.

Term-structure research also depends on construction choices. Prices should be compared on a consistent timestamp and quotation convention, and the contract set must be defined. A history built from “front month,” “second month” and similar relative labels changes the underlying delivery months whenever the market rolls. Consequently, part of an apparent historical change can come from contract replacement rather than a price jump in the same maturity. For reproducible analysis, named contract months or a clearly specified constant-maturity method should be distinguished from rolling ordinal contracts.