What is a futures contract

What is a futures contract

This lesson explains what a futures contract is from the side of obligation and settlement: who is the party to the agreement, what exactly you are buying, who settles the trade, and how to convert price movement into an amount in PLN (Polish złoty). It is written for a reader who already knows the basics — order types, deposit, interest-rate risk — and wants to enter futures without mixing up this market with CFDs.

A futures contract is a standardised agreement. One party undertakes to buy, the other to sell a specified quantity of the underlying at a price set today, with settlement on a fixed future date. The terms — pricing unit, contract size, minimum price increment, available months, and settlement method — are set by the exchange. Because of this standardisation, two strangers can complete a transaction without negotiating a custom contract. Futures is not an option: both parties have an obligation, not a choice. The same standardisation is why different contract months have different prices — that is the carry structure, covered in the lesson contango and backwardation.

Who is the party to the agreement and who settles it

The practical consequence is simple: you do not assess the creditworthiness of the other side of the trade, because clearing does that for you in futures. Retail counterparty risk disappears; what remains is market risk, liquidity risk, and leverage risk. In a CFD, it is the opposite — the broker is the counterparty, and their deposit table and regulations set the position limits. It is the same difference sorted by the lesson CFD or futures.

It is worth separating two things that are often mixed up in conversation: the listing venue and the settlement venue. The exchange provides quotes, liquidity, and the expiry calendar. The clearinghouse guarantees execution. The broker is purely the access channel, and they value your collateral, so two accounts on the same contract can have different deposit requirements. That detail returns in every risk review.

What the futures contract exactly obligates you to do

• A long position is an obligation to buy the underlying at the set price by the expiry date, marked to market daily.
• A short position is symmetrical: an obligation to sell. This is not a loan that must be bought back at any moment, but a contract with the same end date.
• Settlement method — cash or physical delivery. This field in the specification decides whether, on expiry, you see a cash transfer or an obligation to deliver the commodity. Confirm it in the contract specification.
• Closing the position is an offsetting transaction, not a cancellation of the agreement: you sell what you bought at the market price. The closing cost depends on liquidity at that moment.
• No renewal. The contract has an expiry date and cannot be extended. Maintaining exposure longer requires a roll, which means closing the old series and opening a new one.

From these five points follows one practical rule: before you calculate position size, you must know how the position ends. Otherwise, the plan assumes a horizon the instrument does not support.

Futures, spot, and CFD — three different agreements

On the chart, a contract on an index and a CFD on the same index look almost identical. Underneath, the risk issuer, the hours, and the cost of holding the position are all different. Regulators — in Poland, KNF — publish warnings about leveraged products for retail clients. Read current authority communications, not social media summaries.

Why the futures market exists at all

The futures market was created to transfer price risk. A commodity producer hedges a future sale, a buyer hedges a future purchase, and funds and traders accept that risk in exchange for the chance of profit. The second function is price discovery — the live pricing of expectations for future prices, visible as quotes for successive months. The third is standardisation, which allows buy and sell offers to be matched without negotiation.

The practical takeaway for you is simple: the value of this market is liquidity, transparent terms, and clearing settlement — not a promise of profit. The same standardisation means that contracts for different months have different prices — that is the carry structure, covered in the lesson contango and backwardation.

Protocol: seven reads before your first entry

You complete this protocol in a worksheet, before opening an account and before your first demo. The goal is simple: turn the specification into numbers you can compare with capital. All values — point value, tick size, and settlement method — come from the current instrument card from your broker or exchange. Check with your broker, because these parameters differ between contracts and between providers.

point_value          = amount per one price point — from the instrument card
notional              = price × point_value × number_of_contracts
tick_value            = tick_size × point_value
stop_distance_cost    = (distance_to_stop / tick_size) × tick_value
risk_per_contract_PLN = stop_distance_cost × FX_rate

1. Record the contract identifier. The instrument code and the month that is actually the most liquid. Do not copy the name from memory; copy it from the instrument list.
2. Download the current instrument card. Four numbers: tick size, point value, contract size in underlying units, and pricing currency.
3. Record the settlement date and method, plus session hours. Convert hours to the Europe/Warsaw time zone and note that they change when daylight saving time changes.
4. Calculate the notional using the formula above and convert it to PLN using the rate from your account. This is the number that shows what exposure you are really opening.
5. Calculate the tick value and risk per contract for the stop distance from your plan.
6. Compare the result with your risk rule. If 1R exceeds the adopted percentage of capital, reduce the number of contracts instead of “adjusting” the stop. Reference point: 1–2% rule.
7. Repeat the read after one session. If the notional or tick value does not match the first measurement, the source is outdated or you mixed up contracts — go back to step 1.

The numbers from this protocol are yours. Do not copy them from this lesson, because there are no quotes here.

Example account calculation on illustrative numbers

All values below are illustrative numbers. They show only the sequence of actions — they are not the parameters of any specific contract or the table of any broker. Copy your own numbers from the instrument card and from the table of your provider and check with your broker before comparing this calculation with your own.

point_value    = 20 PLN/point    (illustrative)
tick_size      = 0.25 point      (illustrative)
tick_value     = 0.25 × 20 = 5 PLN  (illustrative)
stop_distance  = 40 ticks
cost_to_stop   = 40 × 5 PLN = 200 PLN per contract
1R             = 400 PLN
number_of_contracts = floor(400 / 200) = 2

Two contracts instead of one means twice the exposure and twice the sensitivity to every price move — even though the stop distance in ticks does not change. The same number of ticks on a different contract gives a different amount, because point value and tick size belong to the instrument and the provider. A contract quoted in a different currency requires an extra conversion step at the account rate.

Contract recognition card — fill it in yourself

Fill in one row per contract you are considering. The source and read date column is mandatory: specifications and deposit requirements change, and a row without a date does not tell you whether the data is current. Return to this table for every new instrument and after every broker communication about changed terms.

When the contract says “do not trade”

1. You cannot tell whether settlement is cash or physical. If you do not know the answer before entering, you do not know the consequences of holding the position to the end either.
2. The notional exceeds the exposure you agreed to. A high notional is not inherently wrong, but not knowing its size is. Position size is counted from risk, not from how much free deposit is left.
3. You do not know the expiry date of the series you are opening. A contract without a planned end to the position is a plan with one scenario fewer.
4. The tick value does not reproduce on the second read. A discrepancy between measurements means you are comparing data from different sources or different contracts. Go back to the instrument card instead of trading on a number you cannot repeat.

Common mistakes on first contact with futures

• Treating futures as a “better CFD”. Different risk issuer, different hours, different expiry, and different holding costs.
• Ignoring the expiry month on a swing position, without a roll plan.
• Opening a position whose tick value you cannot calculate in thirty seconds. That is a signal that you do not yet understand the instrument’s risk, not that the instrument is too hard.
• Assuming loss stops at the straight deposited margin. During a violent move, the result can exceed the initial deposit — depending on the market and broker rules. Therefore, position size is counted from 1R, in line with the lesson margin on futures.

What is next

Natural learning sequence: contract specification → margin → market selection → term structure → roll.

At this stage, you do not need to open a futures account. One official specification and one calculated tick in PLN are enough. That is what separates a conscious product choice from trading on a chart that “looks like an index.”

Measurable exercise

This exercise turns your first futures lesson into a single card of numbers: for one contract, you record the settlement method, expiry date, tick value in PLN, and the risk of one contract at the stop from your plan. You fill in eight rows, and the last measurement is repeated after one session. The result is compared with the per-transaction risk limit.

1. Read four fields from the contract specification: settlement method, expiry date, tick size, and point value. Record each field with the read date and source.
2. Calculate the tick value and risk of one contract in PLN for the stop distance from the plan: (distance / tick_size) × tick_value × FX_rate.
3. Compare the result with the per-transaction risk limit. If one contract exceeds the limit, record zero as the allowed number of contracts for this capital.
4. Repeat the entire read after one session and compare both measurements. A row that does not reproduce goes back to the instrument card.

Contract worksheet — fill it in yourself

The “Repeated measurement” column has one job: a value that does not return on the second read is a mistake in the source or the contract, not a feature of the instrument.

Common questions

Is a CFD on an index the same as a futures contract on that index?

On the chart they look similar, but legally they are not. A CFD is an OTC agreement with a broker; futures is an exchange-traded contract with clearing. The costs, hours, holding method, and leverage limits are all different. Reference point: CFD or futures.

Why does the futures market exist at all?

To transfer price risk: a producer and a buyer hedge a future transaction, and the risk-taker counts on profit from the direction. On top of that comes price discovery — the live pricing of expectations for future prices.

Can a loss on futures exceed the deposited margin?

During a violent move, the position result can exceed the initial deposit — it depends on the market and the broker's or FCM's rules. Therefore, position size is counted from 1R, not from how much margin fits on the account.

Why does calculating notional and tick value make sense if I am still trading on demo?

Because without those two numbers, you do not know what exposure you are opening, so you cannot separate the result of a strategy from the effect of a random position size. Notional shows the scale of the move; tick value is the unit in which you measure stop and apply the percentage risk rule. The same 1% rule gives a different position size on two contracts with different point values, and without converting to PLN you compare numbers in different currencies. On top of that comes reproducibility: if you cannot repeat the calculation after a few days, you cannot judge whether a series of losses is a change in market conditions or your own size mistake. Point value, tick size, and deposit requirements are specific to the contract and the broker — always confirm them in the current instrument card.