Futures contract

The exchange fixes everything except the price: the quantity, the grade or specification, the delivery point and the delivery month. That standardisation is what makes one contract interchangeable with another, which is what allows a central order book with a single price at a time, in contrast to the bilateral negotiation behind a forward contract.

The clearing house becomes the counterparty to both sides once a trade is matched, so credit exposure sits with the clearing house rather than with the party across the trade. Positions are marked to market at the end of each session and variation margin passes between accounts daily, which means profit and loss on a futures position is realised as it accrues rather than at the end. At expiry a contract either goes to physical delivery or settles in cash against a published reference, according to its own specification.

Futures matter to contract holders who never trade one, because many index and commodity contracts for difference are priced from a futures contract and therefore inherit its expiry and its roll from one delivery month to the next. Prices for different months differ for carry reasons, described as contango when the further month is dearer and backwardation when it is cheaper, so a price of oil quoted in the news is always the price of one specific month. A continuous chart stitched across rolls is a construction rather than a record of prices anything actually traded at, and comparing returns across it needs care.