Futures Contract

Futures exist on equity indices, government bonds, interest rates, currencies, commodities and some digital assets. Unlike a forward contract, a future has standardized size, expiry and settlement terms, trades on an exchange and is novated to a clearing house, which becomes the counterparty to both sides. Positions are held through a futures commission merchant (FCM) or clearing broker.

The clearing house requires initial margin when a position is opened and settles variation margin daily, so gains and losses are paid in cash each day rather than at expiry. Most futures are closed or rolled into the next contract month before expiry; the rest settle by physical delivery (for example Treasury futures) or cash settlement (for example equity index futures).

How funds account for futures. A future has no upfront cost other than margin, so the notional is off balance sheet and only the open trade equity or cumulative variation margin appears in NAV. Contracts are valued at the exchange settlement price, normally a Level 1 input. Commissions and exchange fees are expensed or included in realized P&L according to policy. Exposure is measured using notional (price × multiplier × contracts) for leverage and risk reporting.

Reconciliation and pitfalls. Daily reconciliation to the FCM statement covers contract counts, trade prices, OTE, margin requirement and cash. Typical breaks come from wrong contract multipliers or tick values, roll trades booked on different dates, give-up trades not yet allocated by the clearing broker, and double counting when both variation margin cash and unrealized P&L are recorded. For bond futures, delivery requires careful handling of the cheapest-to-deliver bond and invoice price, including accrued interest.

Example

A fund sells 5 ten-year Treasury note futures to hedge duration. If the contract price falls by one point with a USD 100,000 face value per contract, the fund receives about USD 5,000 in variation margin that day.