The four contract families
A forward is a bilateral obligation to buy or sell the underlying at a future date at a price agreed today; it trades over the counter (OTC) with counterparty credit risk. A future is the same obligation, standardized and exchange-traded: fixed size and tick, daily mark-to-market settlement, and a central counterparty (CCP) guaranteeing performance. A swap exchanges periodic cash flows — the interest rate swap (fixed-vs-floating) is the most traded OTC instrument in existence. An option is different in kind: the buyer pays a premium for the right (not the obligation) to buy (call) or sell (put) at a strike. Right versus obligation changes the entire risk profile: an option buyer's loss is capped at the premium; a seller's loss scales with the market.
Clearing, margin and the compression of counterparty risk
OTC trades leave each party exposed to the other's default. The CCP absorbs this with three mechanisms: legal novation (it becomes buyer to every seller and seller to every buyer), initial margin sized to cover a bad day, and daily settlement that realizes gains and losses before they compound. When equity falls below maintenance margin, a margin call restores the position to the initial level; failing to fund it forces liquidation. This machinery works quietly in normal times and consumes liquidity violently in stressed ones — which is why institutional desks keep cash buffers above the minimum requirement.
Worked example: daily settlement on one futures contract
- A trader buys one gold futures contract for 100 oz at $2,000/oz.
- Day 2 close: $2,020 → +100 × 20 = +$200 credited to the margin account.
- Day 3 close: $1,995 → −100 × 25 = −$250 debited.
- Cumulative P&L: −$50, exactly the change in contract value from entry.
نتیجه: Daily settlement does not change cumulative P&L — it changes its timing, compressing counterparty exposure from the contract's life to one day. That compression is the architecture of trust in futures markets.
Three uses: hedging, arbitrage, speculation
Hedging offsets an existing risk: an exporter with dollar revenue sells currency futures to lock the conversion rate. Arbitrage builds a zero-investment, risk-free profit from mispriced pairs — buy spot, sell futures when the forward trades above its cost-of-carry fair value; this pressure pins futures to spot. Speculation deliberately accepts risk for return; it is the liquidity provider of last resort, and the most dangerous seat at the table. The same person may hedge operational revenue and run speculative views at the same time — the roles are positions, not identities.
Never infer a contract's economics from its name. Contract size, tick, delivery months, quality and calendar live in the exchange's official specifications — and two 'similar' contracts can differ by multiples in P&L.