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FRM Exam Part I · Futures Markets

Futures Contract Basics and Market Structure for FRM Part I

Updated 11 October 2026 · Fact-checked

A futures contract is a standardized agreement, traded on an exchange, to buy or sell an asset at a set price on a future date. The exchange fixes size, maturity and delivery terms, and a clearinghouse guarantees performance. To answer exam questions, compare it with a forward on standardization, venue, settlement and credit risk.

Understand Futures Contract Basics and Market Structure

A futures contract is an agreement to buy or sell a specific asset at a price fixed today, with delivery or settlement at a set future date. The price agreed is the futures price. The buyer holds the long position and the seller holds the short position. Nothing is paid for the contract itself. Instead, both sides post margin.

A forward contract has the same basic economics but is a private, over-the-counter (OTC) deal. The two parties negotiate size, date, asset and settlement terms. This gives flexibility, but it creates counterparty credit risk and makes it hard to exit early. Forwards usually settle once, at maturity.

Futures are standardized by the exchange. The exchange sets the underlying asset and grade, the contract size, the delivery months, the delivery location and method, the tick size (minimum price move), and often daily price limits. Standardization makes contracts interchangeable, so they trade in a deep, liquid market. Most positions are closed out with an offsetting trade before delivery, so only a small fraction end in physical delivery.

A clearinghouse sits between buyers and sellers. After a trade, it becomes the buyer to every seller and the seller to every buyer. Traders therefore face the clearinghouse, not each other. The clearinghouse manages risk through initial margin, variation margin and daily marking to market: gains and losses are settled every day, so losses cannot build up unnoticed.

Market participants are grouped by purpose. Hedgers use futures to reduce an existing price risk. Speculators take on risk, betting on price direction, and supply liquidity. Arbitrageurs lock in riskless profit when futures and spot prices are out of line. Open interest is the number of outstanding contracts, while volume is the number traded in a period.

Key formulas to remember

Futures contract value at initiation
Value of a new futures contract = 0
No cash changes hands for the contract. Margin is a deposit, not a price.
Long futures payoff at maturity
Long payoff = S(T) − F(0)
S(T) is the spot price at maturity and F(0) is the price agreed at the start. Ignores daily settlement timing.
Short futures payoff at maturity
Short payoff = F(0) − S(T)
The short gains when the price falls. Long and short payoffs always sum to zero.
Total gain on a position
Gain = (F(close) − F(entry)) × contract size × number of contracts (long); reverse sign for short
Daily settlement splits this gain across days but the total is the same, ignoring interest.
Margin call test
Margin call if account balance < maintenance margin; deposit is needed to restore the initial margin level
Standard exchange practice: top up to initial margin, not just to maintenance.
Open interest
Open interest = number of long positions outstanding = number of short positions outstanding
Count each contract once, not both sides. It rises when a new long and new short both open.

How to solve Futures Contract Basics and Market Structure questions

Most questions in this topic are either a concept comparison or a simple profit and margin calculation. Use the same routine each time.

  1. 1Identify what is asked: a feature comparison (forward vs futures), a participant type, or a numerical gain, loss or margin question.
  2. 2For comparisons, test each statement against five features: standardization, trading venue, settlement timing, credit risk and flexibility.
  3. 3For participant questions, ask what the trader's goal is: reduce existing risk (hedger), take a view (speculator) or lock in a riskless gain (arbitrageur).
  4. 4For calculations, write down the position (long or short), contract size, number of contracts and the entry and exit prices.
  5. 5Compute the price change times contract size times contracts. Flip the sign for a short position.
  6. 6For margin questions, update the account balance day by day, compare it with maintenance margin, and compute the call as the amount to restore initial margin.
  7. 7Check the sign and the units, then match the answer to the single option that fits all conditions.

Quickest way: Five-feature comparison and sign check

When to use it: Use for any MCQ asking which statement about futures, forwards or participants is true or false.

  1. Remember futures as: exchange, standardized, margined, marked to market daily, clearinghouse guaranteed, usually closed out.
  2. Remember forwards as: OTC, customized, no daily settlement, credit risk, usually delivered or settled at maturity.
  3. Eliminate options that attribute a futures feature to forwards or the reverse.
  4. For gain or loss, do price change × size × contracts, and make the short the opposite of the long.
  5. For participants, pick by motive, not by instrument used.

Common mistakes in Futures Contract Basics and Market Structure

  • Saying futures have no credit risk at all.

    Students hear that the clearinghouse guarantees trades and stop there.

    Fix: Say credit risk is greatly reduced by the clearinghouse, margining and daily settlement, not eliminated.

  • Treating margin as a payment for the contract or as a down payment on the price.

    It looks like a deposit on a purchase.

    Fix: Margin is performance collateral. A new futures contract has zero value and no price is paid at initiation.

  • Assuming most futures contracts end in physical delivery.

    The contract describes a delivery date, so delivery seems the normal outcome.

    Fix: Most positions are closed with an offsetting trade before delivery. Some contracts are cash settled.

  • Calling anyone using futures a speculator, or any hedger risk-free.

    Students classify by instrument rather than by purpose.

    Fix: Classify by motive. A hedger reduces an existing exposure, though basis risk may remain.

  • Confusing volume with open interest.

    Both measure activity and the words sound similar.

    Fix: Volume counts trades in a period. Open interest counts contracts still outstanding at a point in time. Closing out an existing position lowers open interest.

  • Getting the sign wrong for the short position.

    Students compute the long result and forget the short is the mirror image.

    Fix: Compute the long payoff first, then reverse the sign for the short. The two always net to zero.

Worked examples

Example 1

A speculator buys 10 futures contracts on a commodity at $80 per unit. Each contract covers 1,000 units. The contract settles at $83.50 and the speculator closes the position. What is the total gain or loss, and what would the counterparty short side earn on the same contracts?

Show the solution
  1. Position: long 10 contracts, size 1,000 units, so 10,000 units in total.
  2. Price change = 83.50 − 80.00 = $3.50 per unit.
  3. Long gain = 3.50 × 10,000 = $35,000.
  4. The short side has the opposite sign, so it loses $35,000.

Answer: The long speculator gains $35,000. The short on the same contracts loses $35,000.

Example 2

An investor shorts 5 contracts, each covering 500 units, at $120. Initial margin is $4,000 per contract and maintenance margin is $3,000 per contract. After day 1 the futures price rises to $127. Ignoring interest, what is the margin account balance, is there a margin call, and how much must be deposited?

Show the solution
  1. Total initial margin = 4,000 × 5 = $20,000. Total maintenance margin = 3,000 × 5 = $15,000.
  2. Price rise = 127 − 120 = $7 per unit. Units = 500 × 5 = 2,500.
  3. Short loss on day 1 = 7 × 2,500 = $17,500.
  4. New balance = 20,000 − 17,500 = $2,500.
  5. 2,500 is below the maintenance level of 15,000, so a margin call is issued.
  6. Deposit to restore initial margin = 20,000 − 2,500 = $17,500.

Answer: The balance is $2,500, a margin call is triggered, and the investor must deposit $17,500.

Exam tips

  • Know the forward vs futures table cold: venue, standardization, settlement, credit risk, flexibility. Many questions are just this comparison.
  • Read each option for absolute words like always, never or eliminates. Futures reduce credit risk but do not remove it.
  • In margin problems, the call restores the initial margin, not just maintenance margin, unless the question says otherwise.
  • Classify participants by motive: hedger reduces risk, speculator takes risk, arbitrageur locks in riskless profit.
  • Use a financial calculator or simple arithmetic for price change × units, and check the sign for a short before choosing.

Practice questions from Futures Markets

Futures Contract Basics and Market Structure in other exams

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

Futures Contract Basics and Market Structure: frequently asked questions

What is the main difference between forwards and futures?

Forwards are customized OTC contracts settled at maturity with direct counterparty credit risk. Futures are standardized exchange-traded contracts, marked to market daily and guaranteed by a clearinghouse. This makes futures more liquid and easier to close out.

What does it mean that a futures contract is standardized?

The exchange fixes the terms: underlying asset and grade, contract size, delivery months, delivery method and location, and tick size. Traders only choose price and number of contracts. This makes contracts interchangeable and supports liquidity.

Who are the main participants in futures markets?

Hedgers reduce an existing price risk, speculators take risk to profit from price moves, and arbitrageurs exploit price differences to earn riskless profit. Speculators and arbitrageurs also add liquidity and help keep futures and spot prices aligned.

Do futures contracts always end in delivery?

No. Most traders close out before delivery by taking an offsetting position. Some contracts are cash settled, where the final settlement is a cash payment based on the reference price.