What is a futures contract?

What is a futures contract?

When two parties enter a futures contract, the buyer agrees to purchase the underlying asset at the agreed price when the contract expires, and the seller agrees to deliver it. In practice, the vast majority of futures contracts are closed before expiry: traders take profits or cut losses by trading out of their position rather than waiting for physical settlement. Cash-settled futures, which are standard for indices and most financial contracts, settle the difference in price in cash rather than through physical delivery.

Futures contracts are exchange-traded, which means they are standardised in terms of contract size, expiry date and settlement method, and cleared through a central counterparty. This standardisation makes them highly liquid and transparent compared with many other derivative instruments. The two primary exchanges for futures are the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE).

Key components of a futures contract

How do futures contracts work?

When you open a futures position, your broker sets aside a portion of your account as initial margin. As the market moves, your position gains or loses value on a mark-to-market basis, with daily settlement adjustments. If losses reduce your account balance below the maintenance margin level, you receive a margin call requiring you to deposit additional funds.

The difference between the futures price and the current spot price is called the 'basis'. As a contract approaches its expiry date, the futures price converges with the spot price. This convergence is the mechanism through which futures pricing remains tied to underlying market values.

Most traders who use futures via spread bets or CFDs do not interact directly with contract expiry mechanics: we handle rolling and settlement on your behalf. For those trading listed futures on our US options and futures platform, understanding contract expiry and rollover is important to avoid unwanted settlement.

Types of futures contracts

1. Commodity futures

The original form of futures contract, developed to allow farmers and commercial producers to lock in prices for their crops or raw materials. Today, commodity futures on gold, silver, oil, natural gas, copper, wheat and other markets are traded by a mix of commercial hedgers and speculative traders. Gold futures are among the most widely traded commodity futures globally, with the COMEX 100 troy ounce contract as the standard reference. Commodity markets broadly offer a range of futures-based exposure across metals, energies and agricultural products.

2. Index futures

Futures contracts on stock market indices such as the FTSE 100, S&P 500, Nasdaq 100 and Germany 40. Index futures are always cash-settled, since you cannot physically deliver an index. They are widely used by institutional investors to hedge equity portfolios and by traders to speculate on index direction. Index futures trade nearly 24 hours a day, providing exposure to overnight market moves that cash indices do not.

3. Forex futures

Currency futures contracts specify the exchange of one currency for another at a set rate on a future date. They are used by companies to hedge foreign exchange exposure and by traders to speculate on currency movements. The CME is the primary exchange for forex futures, with contracts on major pairs including EUR/USD, GBP/USD and USD/JPY.

4. Interest rate futures

Futures based on the future level of interest rates or bond prices, including US Treasury futures and Eurodollar contracts. These are primarily institutional instruments, widely used by banks, fund managers and corporations to manage interest rate risk. They are among the most liquid futures markets in the world by volume.

Futures vs options: key differences

Futures and options are both derivative instruments with expiry dates, but they work differently. A futures contract creates an obligation: both parties must fulfil the contract terms at expiry (or close before expiry). An options contract gives the buyer the right, but not the obligation, to exercise. The buyer of an option pays a premium; the maximum loss is the premium paid. With futures, there is no premium, but potential losses are theoretically unlimited on the short side.

For most retail traders using spread bets or CFDs, this distinction is somewhat abstracted: we handle the mechanics of the underlying contract. The relevant difference is that options positions have a fixed maximum loss (the premium), while leveraged futures positions have uncapped downside on short trades.

How to trade futures with IG

We offer two ways to access futures markets with us. Through our spread betting and CFD trading platforms, you can speculate on futures prices across indices, commodities and forex without directly holding exchange-traded contracts. This is the simplest route for most retail traders, with no need to manage expiry or rollover manually.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with us. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

For traders who want direct exchange access, our US options and futures platform provides listed futures on CME and ICE, covering commodity, index and financial futures. Positions are financially settled, not physically delivered, and rollover must be managed before the first notice date.

Futures contract FAQs