A futures contract is a standardized contract between

two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed today (the futures price or strike price) with delivery and payment occurring at a specified future date, the delivery date.

Features
Futures are specialised form of forward contract
Futures are fixed value contract They are exchange traded

Highly liquid than forwards

No counter party risk exist Follow daily settlement Always marked to market

Futures Vs Forwards
Forward Contract Future contract

Tailor made
Traded in over the counter market Less Liquid Does not require margin money Settlement takes place at the end of the period Settlement is only by delivery

Fixed value contract

Traded on exchange Highly liquid Requires margin money Follow daily settlement Settlement is either by delivery or by paying price differentiation

Counter party risk always exist

No counter party risk exist as the contract is made with clearing corporation

Profit or loss is booked on conclusion of Here the contracts are marked to the contract market on a daily basis. Therefore the booking of profit or loss is made daily.

Types of Futures
Stock Index Futures
Underlying asset is stock index Difficult to manipulate

Currency rate Futures

Underlying asset is currency rate Mainly used by exporters and importers Hedge against the risk of currency rate fluctuation

Interest rate Futures

Underlying asset is reference rate eg. LIBOR

Future Terminology
Spot price
Future Price Contract cycle

Expiry dates
Contract size Initial Margin Marking to Market Maintenance Margin