Frequently Asked Questions (FAQ)
The concept explanations below are educational and not investment advice.
What is a futures contract?
A futures contract is a standardized exchange-traded agreement to buy or sell an underlying asset at an agreed price, with settlement on a specific future date. Because they are standardized and traded on exchanges with a clearinghouse, futures contracts differ from forward contracts, which are negotiated privately off-exchange (OTC).
What is the difference between futures, forwards, and spot?
Futures are traded on exchanges with standardized specifications such as contract size and expiry date, and are settled through a clearinghouse. Forwards are private contracts between two parties (OTC) with freely negotiable terms, such as FX forwards or interest-rate forwards. Spot is the buying and selling of an asset for immediate delivery, with no futures contract involved.
How do you calculate a futures contract’s notional value and margin?
Notional value = underlying price × contract size (multiplier) × number of contracts. Example: price 5,000 × multiplier 100 × 2 contracts = 1,000,000. Initial margin = notional × initial margin percent, e.g. 10% × 1,000,000 = 100,000. Maintenance margin = notional × maintenance margin percent, e.g. 8% × 1,000,000 = 80,000.
What is the difference between long and short positions?
Long means buying the contract and profiting when the price rises; short means selling the contract and profiting when the price falls. Example: a long position with entry price 5,000 and exit 5,100, multiplier 100, 2 contracts → gross P&L = (5,100 − 5,000) × 100 × 2 = 20,000. A short position on the same price move produces the same figure in the opposite direction.
What does leverage mean in futures contracts?
Effective leverage = notional value ÷ initial margin. Example: notional 1,000,000 with initial margin 100,000 means 10× leverage. That means a 1% price move on the contract value equals 10% of the margin deposited, so leverage magnifies gains and losses alike.
What are margin calls and liquidation?
A margin call happens when the funds in a margin account fall below the maintenance margin level, requiring the position holder to add funds back up to the initial margin level. If it is not met, the broker can forcibly close the position (liquidation) to stop losses accumulating in that account.
Why do commissions affect the final result?
Commission is paid per contract for each side of the trade — when opening and when closing the position. Example: commission 2 per contract × 2 contracts × 2 sides = 8. If gross P&L is 20,000, then net P&L = 20,000 − 8 = 19,992. ROI is computed from net P&L against initial margin, e.g. 19,992 ÷ 100,000 = 19.992%.