What is Futures Contract?

What are Futures? This is quite a common question, and besides defining futures, it is also important to clarify some key aspects relating to trading futures.

Basically a futures contract is a standardise forward contract based on an underlying asset. This contract will be made between two parties, and on a stock exchange to ensure full standardisation. Traders are offered certain conditions for the underlying asset. These include the expiration date, quantity and the price of execution.

The contract will be executed at a preestablished date and price, and this is a very important factor. A futures contract is thus one of the most liquid financial instruments. It allows for the asset to be bought or sold sometime in the future at the price that has been predetermined. Futures are often used to hedge against the risk of loss as well as for speculation purposes.

The following are key aspects found in every futures contract:

- The name
- The expiration date
- The amount of the underlying asset
- The minimum price fluctuation
- Margin requirements
- Point value
- Settlement
- Trading hours

The margin requirements for futures contracts are very important. There will be the initial margin, that is, the equity that is required to initiate the futures position. Hence this is the amount of money that needs to be on the account before opening a position. This guarantees solvency and reliability.

There is the maintenance margin, which is the amount of money that must be available in the account so as to be able to maintain a futures position running. This is usually slightly less than the initial margin.

The intraday margin is the margin that is specified by the broker for futures day trading. This is valid throughout the entire trading session. The trader will basically agree to close positions before clearing, or else the broker will forcibly close them.