CFA Level I Exam · Forward Commitment and Contingent Claim Features and Instruments

Forward Contracts and Futures Contracts: Features, Payoffs and Margin

Updated 7 October 2026 · Fact-checked

A forward is a private, customized agreement to buy or sell an asset at a set price on a future date. A futures contract is the standardized, exchange-traded version, settled daily through a clearinghouse with margin. To solve questions, find the long's payoff as ST − K, flip the sign for the short, and track margin changes.

Understand Forward Contracts and Futures Contracts

A forward commitment is a binding promise to transact in the future at a price fixed today. Both sides must perform. This is different from an option, where one side has a choice.

A forward contract is traded over the counter (OTC). The two parties customize the underlying, size, delivery date and settlement method. Nothing is paid at the start, and there is usually no cash flow until expiry. The main risk is counterparty credit risk: the losing side may default. Forwards are also illiquid, because you usually can only exit by agreeing a new deal with the same dealer or an offsetting trade.

A futures contract is a standardized forward traded on an exchange. The exchange sets contract size, quality, expiry and delivery terms. A clearinghouse stands between buyer and seller, which cuts credit risk. Prices are set by open trading, and you can close your position any time by taking the opposite trade.

To make the clearinghouse safe, futures use margin and daily settlement (marking to market). You post initial margin when you open the position. Each day, gains are added to your margin account and losses are deducted. If the balance falls below the maintenance margin, you get a margin call. Under the standard CFA convention, your deposit restores the account to the initial margin level (not just to maintenance). The exact rules vary by exchange and broker. Forwards usually have no daily settlement.

At expiry, a contract is settled by physical delivery (the underlying changes hands) or cash settlement (the net gain or loss is paid in cash). Most futures positions are closed out before expiry by an offsetting trade, so delivery is rare. Cash settlement is used where delivery is impractical, such as stock index futures.

Key formulas to remember

Long forward payoff at expiry: Payoff to long = ST − K; ST is the spot price at expiry, K is the agreed forward price. The long gains if the spot price ends above K.
Short forward payoff at expiry: Payoff to short = K − ST; Zero-sum: the short's payoff is the negative of the long's. Multiply by contract size and number of contracts.
Daily futures gain or loss: Gain (long) = (Settlement price today − Settlement price yesterday) × contract size × number of contracts; Short gets the opposite sign. On day 1, use the trade price as the prior reference price.
Margin account balance: New balance = Previous balance + daily gain − daily loss (± deposits or withdrawals); Compare with maintenance margin each day.
Margin call amount: Deposit = Initial margin − Current balance; Applies only when balance is below maintenance margin. Under the standard CFA convention you restore to initial margin, not to maintenance. Exact rules vary by exchange and broker.
Futures value after settlement: Value of futures contract = 0 immediately after daily settlement; Because gains and losses are paid each day, the contract is reset to zero value. A forward keeps accumulated value until expiry.

How to solve Forward Contracts and Futures Contracts questions

Use this method for almost any forward or futures question. Most items test either a payoff, a margin balance, or a feature comparison.

1Identify the contract type: forward (OTC, customized, no daily settlement) or futures (exchange, standardized, daily settlement, clearinghouse).
2Identify your position: long (buyer, gains when price rises) or short (seller, gains when price falls).
3Write the key prices: agreed price K (or prior settlement price) and the new price (ST or today's settlement price).
4Compute the per-unit gain for the long as new price − reference price. Flip the sign for the short.
5Multiply by contract size and number of contracts to get the money amount.
6For margin questions, update the balance day by day and compare with maintenance margin. If below, deposit enough to return to initial margin.
7For feature questions, match each statement to a trait: credit risk, liquidity, customization, regulation, settlement timing.
8Eliminate the two wrong options by checking the sign of the payoff and whether the restore level is initial margin.

Quickest way: Sign-and-size shortcut

When to use it: Use it for numerical payoff and margin items when you have about 90 seconds.

Decide long or short. Write + for long, − for short.
Compute price change = new price − old price. A rise helps the long.
Multiply by size. Apply the sign for your side.
For margin: balance after the day = old balance + gain. If below maintenance, deposit = initial margin − balance.
Check that your sign matches the direction of the price move and your position.

Common mistakes in Forward Contracts and Futures Contracts

Restoring the margin to the maintenance level after a margin call.
The word 'maintenance' makes students think that is the target.
Fix: Maintenance is only the trigger. The deposit brings the balance back up to the initial margin.
Giving the short the same sign as the long.
Students memorize ST − K and apply it to every position.
Fix: Forwards and futures are zero-sum. The short's payoff is K − ST, the exact opposite.
Saying forwards have no credit risk because they need no upfront payment.
No cash changes hands at the start, so risk seems absent.
Fix: Forwards have counterparty risk because the losing party can default at expiry. Futures reduce it with a clearinghouse and daily settlement.
Treating a futures contract as keeping accumulated value until expiry.
Students mix up forward and futures valuation.
Fix: Futures are marked to market daily, so their value resets to zero after each settlement. A forward accumulates value until it ends.
Assuming most futures end in physical delivery.
The contract describes delivery, so students assume it happens.
Fix: Most futures positions are closed by an offsetting trade before expiry. Cash settlement is also common.
Using the original trade price every day when computing futures gains.
Students copy the forward payoff logic.
Fix: For futures, each day's gain uses the change from the previous day's settlement price, not the original price.

Worked examples

Example 1

An investor buys 10 futures contracts at 1,200.00. Each contract covers 50 units. Initial margin is 4,000 per contract and maintenance margin is 3,000 per contract. The day-1 settlement price is 1,170.00. What deposit is needed to meet any margin call?

Show the solution

Position is long, so a price fall is a loss.
Loss per unit = 1,170 − 1,200 = −30.
Loss per contract = −30 × 50 = −1,500.
Total loss for 10 contracts = −15,000.
Initial margin total = 4,000 × 10 = 40,000. Balance after day 1 = 40,000 − 15,000 = 25,000.
Maintenance total = 3,000 × 10 = 30,000. The balance 25,000 is below 30,000, so a margin call is triggered.
Deposit = initial margin − balance = 40,000 − 25,000 = 15,000.

Answer: A deposit of 15,000 is needed, which restores the account to the initial margin of 40,000.

Example 2

A short position in a forward contract was agreed at a forward price of EUR 80 per unit for 1,000 units. At expiry the spot price is EUR 86. What is the payoff to the short, and how does it compare with the long's payoff?

Show the solution

Short payoff per unit = K − ST = 80 − 86 = −6.
Total short payoff = −6 × 1,000 = −EUR 6,000.
Long payoff per unit = ST − K = 86 − 80 = +6.
Total long payoff = +EUR 6,000.
The two payoffs are equal and opposite, so the contract is zero-sum.

Answer: The short loses EUR 6,000 and the long gains EUR 6,000.

Exam tips

Always confirm long or short before you do any arithmetic. The sign is the most common trap.
For margin calls, check whether the question asks for the deposit amount or the new balance. Restore to initial margin, not maintenance.
Feature questions often test credit risk, liquidity and customization. Link forward to OTC, customized, higher credit risk and futures to exchange, standardized, clearinghouse.
Remember there is no penalty for guessing. If unsure, eliminate options with the wrong payoff sign first, then choose between the rest.
Read whether the question says physical delivery or cash settlement. Cash settlement pays only the net gain or loss.

Practice questions from Forward Commitment and Contingent Claim Features and Instruments

Forward Contracts and Futures Contracts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Forward Contracts and Futures Contracts: frequently asked questions

What is the main difference between a forward and a futures contract?

A forward is a private, customized OTC agreement with credit risk and usually no payments until expiry. A futures contract is standardized, exchange-traded, cleared through a clearinghouse and settled daily with margin.

What is marking to market in futures?

It is the daily settlement of gains and losses. Each day your margin account is credited or debited by the change in the settlement price times the contract size. This keeps the contract's value at zero after settlement and limits default risk.

What is the payoff formula for a forward contract?

At expiry, the long's payoff is ST − K and the short's payoff is K − ST. Multiply by the contract size to get the money amount. The two payoffs always sum to zero.

What happens when the margin balance falls below maintenance margin?

The clearinghouse or broker issues a margin call. Under the standard CFA convention, you must deposit enough to bring the balance back to the initial margin level. The exact rules vary by exchange and broker, and if you do not meet the call, the position can be closed out.