Agree on a future price today: contract specs, margin and mark-to-market, going long and short, basis, rolling contracts, delivery and hedging.
For: learners who know the stock basics and want to understand futures
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
This course uses ideas from the courses below (optional; you can start right away).
A farmer and a bakery agree today on the price of wheat in 3 months. That's a futures contract: a standardized agreement to buy or sell at a fixed price in the future.
How much of the underlying is in one futures contract? How much is one price tick worth? Read the contract specs to get your P&L right.
Futures only require part of the value as margin, but P&L is settled at the settlement price every day at the close. Drop below maintenance margin and you must top up.
Shorting futures needs no borrowing: just sell the contract and profit when the price falls. Gains and losses for longs and shorts are perfectly symmetrical.
The futures price isn't the same as the spot price, and the gap between them is the basis. As expiry approaches, the futures price moves toward spot.
Futures expire. To hold for the long run, you close the near month and buy a later month before expiry, which costs money in contango.
How does a contract wrap up at expiry: physical delivery, cash settlement, or closing early? And how is each day's settlement price worked out?
Selling the same wheat future, a farmer with wheat is "buying insurance" while a trader without wheat is "placing a bet". The basis decides how precisely a hedge locks in the price.