What are futures contracts? CME Group explainer
Our summary
CME Group, which runs large futures exchanges, explains what a futures contract is and how it differs from a forward contract.
- Definition: a futures contract is a legally binding agreement to buy or sell a standardized asset on a specific date or during a specific month, traded on a futures exchange.
- Standardization: the exchange fixes the quantity, quality and delivery details. The video's examples are 5,000 bushels of corn for March delivery and 62,500 British pounds for December. Because everything else is fixed, price is the only variable.
- Price discovery: prices are found through bids and offers until buyers and sellers match.
- Central clearing: the clearinghouse becomes the buyer to every seller and the seller to every buyer, which the video says greatly reduces the risk that one side defaults. Forwards are private agreements without that guarantee.
- Who uses them: producers, consumers, traders and investors, to hedge or take on price risk.
Our take: many prop-firm evaluations and index traders use futures, so understanding contract specs comes before any strategy. Leverage makes futures risky: small price moves can mean large gains or losses.