Futures Contracts

Standardized exchange contracts to buy or sell a commodity at a set date, margined daily and rarely delivered.

Overview

Each contract fixes quantity, quality, delivery point, and months, 1,000 barrels at Cushing, 5,000 bushels in store, so only price is negotiated. Clearinghouses stand between buyers and sellers, collecting margin and settling variation cash daily, which mutualizes counterparty risk and makes default rare. Most positions offset before delivery, with physical delivery under 2 percent on most contracts and cash settlement common where the underlying is an index. Position limits and reporting rules police corners. Leverage is the draw and the danger: putting up 5 to 10 percent of notional means a small adverse move wipes the deposit, which is why margin management is the whole discipline.