Futures contracts — what are they

What is a futures contract?

A futures contract is an agreement between two parties to buy or sell a specific asset in the future at a predetermined price. It's standardized and traded on exchanges.

Unlike options — futures oblige both parties to execute the transaction.

Quick Answer

A futures contract is a standardized agreement traded on exchanges to buy or sell a specific asset in the future at a predetermined price; unlike options, it obliges both parties to execute. You do not pay the full value — a margin deposit of usually 5–15% is enough, creating financial leverage (a 50,000 PLN WIG20 contract needs ~5,000 PLN, leverage 1:10). Underlying instruments span indices, currencies, commodities, bonds and crypto, and most positions are closed via cash settlement before maturity. Because losses can exceed the deposited margin, futures are high-risk instruments. This is educational information, not investment advice.

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How do futures work?

Mechanism

1. Buyer (long) commits to buy the asset at a specific time
2. Seller (short) commits to sell
3. Price is set at the moment of contract execution
4. In practice, most contracts are closed before maturity (cash settlement)

Margin deposit

You don't need to pay the full contract value. A deposit is sufficient — usually 5-15% of value. This creates financial leverage.

Example: WIG20 contract worth 50,000 PLN requires ~5,000 PLN deposit. Leverage 1:10.

What are futures contracts for?

Popular underlying instruments

• Stock indices — WIG20, S&P 500, DAX
• Currencies — EUR/USD, USD/PLN
• Commodities — oil, gold, wheat
• Bonds — e.g. US Treasury futures
• Cryptocurrencies — BTC, ETH (on CME)

Who uses futures?

• Hedgers — companies hedging against price changes (e.g. airlines hedging fuel prices)
• Speculators — earn from price changes, accepting risk
• Arbitrageurs — exploit price differences between markets

Risk

• Leverage — losses can exceed deposited margin
• Margin call — if deposit falls below minimum, broker requires additional payment
• Liquidity — some contracts have low liquidity
• Rolling — need to close expiring contract and open new one (contango costs)

Futures vs options

Futures on GPW

On the Warsaw Stock Exchange (GPW) available contracts include:

• WIG20 index
• Selected stocks (KGHM, PKO BP, PKN Orlen)
• Currencies (USD/PLN, EUR/PLN)

How Freenance can help

Freenance allows including futures positions in the complete portfolio picture, tracking exposure and leverage impact on your finances.

👉 Track your entire portfolio in Freenance — freenance.io

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FAQ

What is the initial margin in futures trading?

Initial margin is the amount you must deposit with the broker to open a futures position. It is only a fraction of the full contract value — typically 5–15% — and acts as a security buffer rather than a payment for the underlying asset.

How does leverage work in a futures contract?

Because the margin is much smaller than the notional value of the contract, even a small price move generates a relatively large profit or loss compared to the deposited capital. Leverage can multiply both gains and losses, so it can amplify risk to your portfolio.

What is daily mark-to-market settlement?

Each trading day, futures positions are revalued at the official settlement price, and the resulting profit or loss is credited or debited from the margin account. This mechanism prevents accumulation of unsettled losses and is enforced by the clearing house.

What happens during a margin call?

When losses push the margin below the required maintenance level, the broker issues a margin call asking you to top up the account. If you do not add funds in time, the position may be closed forcibly at the prevailing market price, which can crystallise significant losses.

Is cash settlement the same as physical delivery?

No. In cash settlement only the difference between the contract price and the reference price on expiry is exchanged, with no transfer of the underlying asset. Physical delivery, used in some commodity contracts, involves actually transferring the asset and is rarely the preferred outcome for retail traders.