Futures and forwards — course checkpoint

You began this course able to see futures quotes. You finish able to take one apart: what the contract obliges, what it costs to carry, what it demands in cash, and who is on the other side of it. Let us gather the whole thing into one picture.

Unit 1 — the contract

A forward is a private, bespoke agreement to trade at a set price on a future date: perfectly tailored, illiquid, and fundamentally a credit exposure to whoever is on the other side. A future is the same economic promise, standardised by an exchange — underlying, contract size, tick, delivery month, settlement type — and novated to a clearing house, which becomes counterparty to everyone.

Standardisation costs you customisation and buys you liquidity, because identical units are units you can always sell. The spec is where a quote becomes money: crude 1,000 barrels ($0.01 = $10 a tick), corn 5,000 bushels, the E-mini S&P $50 per index point. Contracts either deliver physically or settle in cash, and the mere possibility of delivery is what ties the contract to the real world.

Unit 2 — margin and the daily settle

Margin is a performance bond, not a purchase and not a loan. Initial margin opens the position; maintenance margin is the floor, and breaching it triggers a call to restore to initial, so the call always exceeds the shortfall.

Every night the clearing house marks every position to the settlement price and moves the cash. There is no unrealised loss in futures — only a chain of daily realised ones, and your entry price stops mattering after day one. Our three-day walk: $6,000 posted, two $1,500 calls, $9,000 of cash committed to a position that finished $1,000 down. And the governing ratio: $6,000 of margin against $80,000 of notional is 13.3× leverage.

Unit 3 — the curve

Futures prices are not forecasts. F = S + financing + storage − income. Six-month gold at $2,000 spot, 5% rates and 0.4% storage prices near $2,054; a three-month index future sits above spot by S × (r − q) × t. Basis = spot − futures, and it must converge to zero at expiry — which is exactly why hedging works at all, and why you can lose $54 an ounce with spot unchanged.

Curve sloping up is contango (real carry, ample supply); sloping down is backwardation (convenience yield, a tight physical market). Rolling converts that shape into realised P&L: $1.50 a month of contango on an $80 price is roughly −20% a year with spot unchanged, and the same curve backwardated is roughly +25%. Total return = spot + roll + collateral.

Unit 4 — who uses it and why

A producer short-hedges, a consumer long-hedges, and both convert an unknown future price into a known one, paying for it with the upside — our farmer landed at $4.50 a bushel whether corn went to $4.10 or $5.30. But a hedge locks futures price + basis, so basis risk survives; cross-hedges add correlation risk; hedge ratios ((exposure × sensitivity) ÷ contract notional) round to whole contracts and drift as beta drifts. Open interest counts live risk; the COT report buckets who holds it — and commercials sitting net short is the mechanism working, not a forecast.

The risk statement, stated plainly

Futures are leveraged instruments. Because your obligation is the full notional while your collateral is a fraction of it, losses can exceed the initial margin entirely, leaving a debit balance you owe. Daily settlement can force liquidation of your position at a time and price you do not choose — including in a market that subsequently moves in your favour. Stop orders do not guarantee prices, because markets gap. Margin requirements can be raised mid-position, forcing you smaller exactly when conditions are worst.

None of these are edge cases. They are ordinary properties of the instrument, and they are why futures are professional risk-transfer tools rather than a place to learn by doing.

What you can now do

Read a contract spec and convert a quote into dollars. Follow a margin sequence day by day and see where the funding pressure actually lands. Price a future from carry and recognise when the market is not forecasting anything. Read a curve and predict the sign of the roll. Construct a hedge and name precisely what it fails to remove. Read positioning data without over-reading it.

Before you sit it

Each of these is a minute at your desk. Any one that is not names the lesson to reopen first.

• Name two things an exchange changes about a forward to turn it into a future — Why did exchanges turn the forward into a standardised future?
• Say what happens to your account every evening while a futures position is open — Why does a futures position cost you money every single day it moves against you?
• Say what basis must equal at expiry, and why it has no choice — What is basis, and why must it collapse to zero?
• Say why no hedge is ever perfect — Why is no hedge ever perfect?

Try it now

1. Pick one commodity and write six sentences: its contract spec, its notional per contract, today's curve shape, the sign of its roll, who its natural hedgers are, and what current positioning looks like.
2. Verify each one, taking crude as the worked example. The traded price is the continuous front future, charted first below. The cash price at Cushing, a monthly average, is in the table under it: set its latest month against the chart's price for the same month. The spec and today's curve come from the exchange's own contract page and Settlements page (CME Group, Crude Oil), and positioning from the CFTC's public Commitments of Traders report. Mark each sentence with the source that confirmed it.

3. Then say the sentence this course was built around: a futures price is mostly carry, and a futures position is mostly a funding problem.

Checkpoint quiz next. Nothing in this course was a recommendation to trade futures, forwards or anything else — you have learned to read a leveraged contract accurately, which is a literacy skill, not a signal.