What Is a Futures Contract? The Obligation, the Standard Terms, and Why Futures Exist

A futures contract is a legally binding agreement to buy or sell a fixed quantity of something, such as 5,000 bushels of corn, 1,000 barrels of crude oil, or $50 times the S&P 500 index, at a price agreed today, for settlement on a specific future date. Both sides are obligated: the buyer must buy and the seller must sell, unless they close the position before it expires.

In short: a futures contract is a standardised promise traded on an exchange. The exchange fixes everything except the price: the quantity, the quality, the delivery month and place, and the last day of trading. Buyers and sellers agree only on price, a clearing house stands between them, and gains and losses are settled in cash every day. Futures exist so that producers and users of a commodity or financial asset can lock in prices, and so that others can take on that price risk.

The common misconception: “a bet on the price”

People often describe futures as bets on where a price is going. That is how some participants use them, but it misses what a futures contract actually is. It is a forward obligation. If you buy (go long) one December corn contract and hold it into the delivery process, you can end up responsible for paying for 5,000 bushels of corn. If you sell (go short) and hold, you can be required to deliver them.

Most futures positions never reach delivery. Traders close them out by doing the opposite trade before expiry: a buyer sells the same contract, a seller buys it back. The two positions cancel, and only the gain or loss remains. But the obligation is the reason the price of a futures contract tracks the real-world price of the thing it represents. Without the possibility of delivery (or a cash settlement tied to a real index), the futures price would float free.

What “standardised” means

A futures contract is identical to every other contract with the same symbol and month. That is what makes it tradable by strangers on an exchange. The exchange writes the terms in its rulebook and publishes them as contract specifications. A few real examples from CME Group’s published specs:

Contract (exchange)	Size of one contract	Minimum price move (tick)	Value of one tick	How it settles
E-mini S&P 500, ES (CME)	$50 x the S&P 500 index	0.25 index points	$12.50	Cash
Micro E-mini S&P 500, MES (CME)	$5 x the S&P 500 index	0.25 index points	$1.25	Cash
Light Sweet Crude Oil (WTI), CL (NYMEX)	1,000 barrels	$0.01 per barrel	$10.00	Physical delivery at Cushing, Oklahoma
Corn, ZC (CBOT)	5,000 bushels	1/4 cent per bushel	$12.50	Physical delivery

Because the terms are fixed, a buyer in Chicago and a seller in Calgary who have never met can trade with each other in a fraction of a second. Neither needs to negotiate the quantity or the grade of the oil. The full anatomy of a spec sheet, including month codes and last trading days, is in futures contract specifications.

The pieces of the system

Four parts make a futures market work:

The exchange lists the contract, runs the electronic order book, and publishes a daily settlement price. In North America the big ones are CME Group, ICE, Cboe Futures Exchange, and the Montréal Exchange in Canada. See how futures exchanges work.
The clearing house becomes the buyer to every seller and the seller to every buyer once a trade is matched. CME’s rulebook calls this substitution, or novation. You never carry the credit risk of the stranger on the other side, only the clearing system’s.
Margin is a good-faith deposit you post with your broker so the clearing house is protected if your position loses money. It is a fraction of the contract’s full value, which is where the leverage in futures comes from. The details are in how futures margin works.
Daily settlement (mark-to-market) moves cash between winners and losers every trading day, based on the exchange’s settlement price. Losses cannot pile up silently until expiry.

A worked example: a farmer and a miller

Here is the classic case, with real contract terms and illustrative prices.

In spring, a corn farmer expects to harvest plenty of corn by autumn. A flour and feed miller knows it will need corn in December. December corn futures trade at $4.50 per bushel (an illustrative price).

The farmer sells one December corn contract at $4.50. Contract value: 5,000 bushels x $4.50 = $22,500.
The miller (or anyone else on the other side) buys one contract at $4.50.

By autumn, a big harvest has pushed December corn down to $4.20.

Price change: $4.50 minus $4.20 = $0.30 per bushel.
In ticks: $0.30 / $0.0025 = 120 ticks.
In dollars: 120 ticks x $12.50 = $1,500 (the same as 5,000 x $0.30).

The farmer’s short futures position has gained $1,500. The farmer sells the actual corn locally at a lower price, but the futures gain offsets most of the drop. The effective price works out close to the $4.50 the farmer locked in, minus any difference between the local price and the futures price (called basis).

The buyer of the contract lost $1,500. If that buyer was the miller, it also pays less for its physical corn, so its overall cost is close to what it locked in too. If the buyer was a speculator with no corn business, the $1,500 is simply a loss.

Notice that nobody needed to deliver corn through the exchange for this to work. Both sides could close their futures and buy or sell the physical grain where it suited them.

Reading a futures quote

A futures quote packs a lot into a few characters. Take a line on a quote screen reading ESZ26 6,012.25 +8.50 (illustrative numbers):

ES is CME’s code for the E-mini S&P 500.
Z is the month code for December; 26 is the year. This is the December 2026 contract, which expires on the third Friday of December.
6,012.25 is the last traded price in index points.
+8.50 is the change from the previous day’s official settlement price, not from the last time you looked.

To turn that into money, multiply by the contract’s multiplier. The notional value of one contract is 6,012.25 x $50 = $300,612.50. The day’s change is 8.50 x $50 = $425 per contract, or 34 ticks of $12.50. Someone long one contract from yesterday’s settlement is $425 better off so far today; someone short is $425 worse off.

The same arithmetic works for every contract once you know its size and tick value, which is why the spec sheet is the first thing to read.

Why futures exist

Futures grew out of 19th century grain markets. CME Group’s own history traces the first futures exchange to the founding of the Chicago Board of Trade by grain merchants in 1848. The problem they solved has not changed:

Producers (farmers, oil drillers, miners) face the risk that prices fall before they can sell.
Users (millers, refiners, airlines, food companies) face the risk that prices rise before they can buy.
Financial institutions face the risk of moves in interest rates, currencies, and stock indexes.

Futures let each of them transfer price risk to someone willing to hold it. That someone may be another hedger with the opposite exposure, or a speculator who accepts the risk in exchange for the chance of profit. The cast of characters is covered in who trades futures.

Futures also produce something everyone else uses: a public, continuously updated price. When news reports “oil” at a certain dollar figure, it is very often quoting the front-month WTI futures price on NYMEX.

Futures compared with buying the thing itself

	Buying the asset	Buying a futures contract
Upfront cost	Full price	Margin deposit, a fraction of the value
Ownership	You own it now	You own an obligation; nothing changes hands until settlement
Expiry	None	Every contract has a last trading day
Daily cash flows	None until you sell	Gains and losses settled daily
Maximum loss on a long position	What you paid	Can exceed your deposit

The last row matters most. Because you only deposit margin, a price move against you can cost more than everything you put up.

What can go wrong

Leverage cuts both ways. One ES contract at an index level of 6,000 controls $300,000 of S&P 500 exposure (6,000 x $50). A 5% fall is 300 points, or $15,000, which can be a large share of the margin deposit.
Losses beyond your deposit. If the market gaps past the level where your broker would close you out, you owe the difference.
Expiry and delivery. Holding a physically delivered contract too long can create a delivery obligation you are not equipped for. Brokers usually force retail accounts out ahead of time, sometimes at an inconvenient price. Physical vs cash settlement explains the dates that matter.
Not the same as the spot price. Futures prices include the cost of carrying the asset until delivery, so they usually differ from today’s price. See how futures prices are set.

The short version

A futures contract is a standardised obligation to buy or sell a fixed amount of an asset at an agreed price on a future date. The exchange sets every term but price, a clearing house guarantees performance, margin secures the promise, and daily settlement keeps everyone current. Hedgers use futures to shed price risk and speculators take it on. The small deposit makes futures efficient, and it also makes them dangerous for anyone who forgets the full size of what they control.