What does an exchange change about a forward?
A future is a forward that has been put through an exchange. Same economic idea, three structural changes — and each one trades away flexibility for something else.
Change 1 — standardisation
The exchange, not the two parties, sets the terms. One WTI crude futures contract is 1,000 barrels, of a specified grade, for a specified delivery month, quoted in cents per barrel. You cannot have 1,340 barrels on 15 October.
You lose the perfect fit. What you gain is enormous: because every contract is identical, contracts are interchangeable. Your position is the same object as thousands of others, so it can be bought and sold freely rather than negotiated away. Standardisation is what creates liquidity.
Change 2 — a clearing house in the middle
Once the trade is matched, the exchange's clearing house steps between the two sides. You no longer face the firm you traded with; you face the clearing house, and so do they. This is the reason a futures position can be closed by simply trading the opposite way with anybody at all — there is nobody to renegotiate with. Unit 3 covers the machinery in full.
Change 3 — daily settlement (mark-to-market)
A forward accumulates a debt until maturity. A future settles it every single day in cash.
Go long one crude contract at $80.00:
| Day | Settlement price | Change | Cash movement (1,000 bbl) | Cumulative |
|---|---|---|---|---|
| 1 | $81.20 | +$1.20 | +$1,200 credited | +$1,200 |
| 2 | $79.50 | −$1.70 | −$1,700 debited | −$500 |
| 3 | $82.00 | +$2.50 | +$2,500 credited | +$2,000 |
After three days you are up $2,000, which is exactly (82.00 − 80.00) × 1,000 — the same result a forward would give. The total is identical; the timing is not. The forward pays once at the end; the future pays a little every day.
That daily payment is called variation margin, and it is doing something profound: it prevents an unpaid obligation from ever building up. A loss you cannot fund shows up tomorrow morning, not in eight months. It also means a futures position can demand cash from you on any given day even though you "paid nothing" to open it.
OTC versus exchange-traded, side by side
| Over-the-counter (forwards, most swaps) | Exchange-traded (futures, listed options) | |
|---|---|---|
| Terms | Bespoke — any size, any date | Standardised by the exchange |
| Counterparty | The specific firm you signed with | The clearing house |
| Credit exposure | Accumulates until maturity | Reset to zero daily by margin |
| Getting out | Negotiate, or write an offsetting trade | Trade out with anyone, any time |
| Transparency | Private; regulators see it via trade reporting | Public prices, volumes, open interest |
| Visible cost | No fee — priced into the spread | Explicit fees, plus cash tied up as margin |
Neither column is superior. They solve different problems, and the largest markets in the world sit in the left column precisely because exact dates and amounts matter to real businesses. After 2008, regulators pushed the standardised portion of the OTC market into central clearing — the middle ground you will meet in Unit 3.
Try it now
- A month of daily candles is below. Pick any five consecutive sessions and read the five closes off them.
- Build the mark-to-market table above for a hypothetical long position of 1,000 units, computing each day's cash movement and the running total.
- Confirm the running total equals (last price − first price) × 1,000 — Measure the whole week to check it in one drag. Then note the largest single-day debit in your table. That is the amount a real position would have required in cash that morning, regardless of how the week ended. Timing is a risk of its own.