Futures and Forwards

Editorial status: PUBLISHED. AI-assisted educational material; user batch approval recorded on 2026-10-19. Contract quantities, prices and settlement choices are invented.

Learning objectives

• Distinguish an obligation for a future exchange from present physical ownership.
• Separate cash settlement from delivery under a contract.
• Identify the actual margin, closeout and counterparty arrangements.

The contract specifies a future obligation

A futures contract creates obligations under its terms; a forward arrangement can similarly specify a future exchange negotiated between parties. Do not infer the settlement method, collateral or transferability from the word alone. Read the particular contract and venue or bilateral agreement.

CFTC education describes futures and options, with physical or cash settlement depending on the contract. It explains that leverage can produce losses beyond initial funds. Its U.S. educational scope does not authorize this site or its readers to trade. CFTC: Futures basics

The economic-purpose material explains margin as performance assurance rather than a down payment on physical goods. Requirements and marking-to-market depend on the actual arrangement. CFTC: Futures mechanics

Worked example: same price difference, different completion

Imagine a fictional buyer agrees to purchase 50 commodity units at 100 each on a future date. At that date the teaching reference is 90. A linear long price result is 50 × (90 − 100) = −500, before costs.

In a hypothetical cash-settled version, the contractual calculation can require a 500 payment by the long under the specified terms, without delivering the goods. In a hypothetical physical-delivery version, the buyer pays 5,000 and receives the specified 50 units, whose reference amount is 4,500. Both expose the buyer to the same isolated price difference here, but their cash, logistics and completion obligations differ.

The buyer must not assume that posting 500 of margin purchases the 5,000 of goods or limits all possible loss to 500. The actual collateral, daily settlement and closeout rules determine the workflow. A token recording the contract does not change that distinction.

Trade agreement → future obligation
  ├→ cash-settled formula → calculated payment
  └→ physical terms → payment + specified goods delivery
Margin/ collateral: separate performance and liquidity requirements

Compare clearing and bilateral exposure

Ask who is the contractual counterparty and whether a clearing arrangement intervenes. Do not assume every forward is uncollateralized or every futures contract has identical default protection. Contracts and institutions determine the relevant safeguards and remaining exposures.

PFMI separates legal basis, finality and linked obligations. These principles help analyze settlement boundaries, not certify a classroom contract. BIS: PFMI

For a hedge, identify the exposure being offset and what remains. The delivery specification, quantity, timing or reference can differ from the actual business need. A positive result on one contract can coexist with losses elsewhere. The existence of a hedge is not a guarantee of a profitable total business outcome.

Record expiry, settlement reference, valuation source, unit multiplier, currency, margin, fees, closeout, physical requirements if any and evidence date. A quoted price without the multiplier can conceal the size of the obligation.

Common misconceptions

“Margin is the purchase price of the commodity.” Performance collateral and full delivery payment are different.

“Cash-settled means I receive the physical asset.” The contract can settle a calculated difference only.

“A hedge removes every risk.” Quantity, timing, reference and counterparty differences can remain.

Risks and limits

This chapter does not recommend derivatives, establish trading eligibility or describe a named contract's current rules. The example assumes a simple linear long position and omits intermediate marking-to-market, fees and default. No trade, margin account, clearing service or physical delivery was tested.

Exercise and answer

Exercise: Fifty units are contracted at 100 and the settlement reference is 90. What is the teaching long price result, and does cash settlement deliver the commodity?

Answer: The isolated result is −500. Cash settlement follows its specified payment formula and does not by itself deliver goods; physical delivery is a separate contractual design.

Related learning

Continue in the commodities track with perpetual funding and liquidation. Revisit settlement boundaries through Learn.

Source map

cftc-futures-basics, cftc-futures-mechanics and bis-pfmi were actually read on 2026-10-18. Scopes are U.S. derivatives education and international principles. All quantities, prices and contract alternatives are original teaching assumptions; no product or legal settlement was tested.