Futures contract

Definition

A futures contract is a standardized, exchange-traded agreement to buy or sell a specified quantity of an underlying (index, rate, currency, commodity) at a fixed price on a future date. Unlike options, both sides are obligated. US futures markets are regulated by the CFTC; contracts are cleared centrally and marked to market daily.

How it works / structure

• Standard terms (ms-contract-specs): underlying, contract size/multiplier, tick size and tick value, expiration months, settlement method (physical delivery or cash settlement).
• Daily mark-to-market: gains and losses are settled in cash every day through variation margin; there is no premium — the position’s value starts at zero and P&L accrues from price change times multiplier.
• Margin as performance bond (ms-futures-margin): initial margin is a good-faith deposit, typically a small fraction of notional, which is what makes futures inherently leveraged.
• Finite life: positions must be closed, delivered, or rolled to a later month (ms-futures-roll).
• Simulation parameters: multiplier, tick value, margin requirements, roll schedule and roll cost, session hours (many futures trade nearly 24 hours on weekdays).

When it applies

Direct expressions of index, rate, currency, and commodity theses (lens-macro, lens-market); the standard vehicle for trend following and carry strategies; hedging equity exposure without selling holdings. Nearly-24-hour sessions make futures the venue where overnight macro news is priced first.

Risk profile & failure modes

• Leverage cuts both ways: because margin is a fraction of notional, losses can exceed the deposit; the CFTC’s education materials state this plainly. Position size must be reasoned from notional, not from margin.
• Margin calls and forced liquidation: falling below maintenance margin triggers a demand for funds; unmet calls are closed out at market.
• Roll costs: maintaining a position across expirations pays the calendar spread; in contango-shaped curves this is a recurring drag for longs (strategy-futures-carry covers the evidence).
• Delivery risk: holding physical-delivery contracts past first notice can create delivery obligations most traders never intend.
• Session gaps and limit moves: exchanges impose daily price limits on some contracts; markets can be unable to trade at the limit.

Evidence & limits

Contract mechanics are exchange/regulator rules, not hypotheses. Positioning in futures is publicly measurable via the CFTC’s Commitments of Traders reports (sent-cot-reports). Return evidence for futures-based strategies (trend, carry) lives in the pillar-4 entries with citations; this entry makes no return claims.

Falsifiable-thesis examples

Illustrations only, not signals:

• “The front-month contract on X will settle above P on date D” — falsified by a settlement at or below P.
• “The X curve, in contango today, will invert (front above second month) within 60 days” — falsified if the spread never inverts in the window.

Cross-references

• Mechanics: ms-futures-margin, ms-futures-roll, ms-contract-specs, ms-settlement
• Derivatives: instrument-futures-option
• Strategies: strategy-futures-trend-following, strategy-futures-calendar-spread, strategy-inter-market-spread, strategy-futures-carry
• Data: sent-cot-reports