A futures contract is a standardised agreement, traded on an exchange, to buy or sell an asset at a price fixed today, with the deal completed on a future date. Most futures are settled in cash, which means the two parties exchange only the difference between the agreed price and the price on the expiry date, not the asset itself.
What does a futures contract fix in advance?
A futures contract fixes three things at the start: the underlying asset (the thing the contract is based on), the price, and the expiry date, which is the day the contract ends. Nothing is exchanged when the contract is made, apart from the agreement itself. The value changes hands at expiry, or earlier if you exit.
Because the price is locked, both sides know what they have agreed to. What they do not know is how the market price will move before expiry. That gap between the agreed price and the later market price is where gains and losses come from.
Why can’t the two parties change the terms?
The exchange sets the quantity, quality and lot size of every contract. The two parties cannot negotiate these details with each other, as they might in a private deal.
This standardisation makes contracts easy to trade, since every contract of the same type is identical. The catch is that the terms may not suit you. If the lot size is 100 units and you need 60, you cannot buy 60. You must either take a full lot or look for another way to meet your need.
Can you exit before expiry?
Yes. A holder can transfer the contract to another party, or take an offsetting position. A buyer who wants out can sell an identical contract, and a seller can buy one back. Either way, the trade does not have to be held until expiry.
The offsetting position fixes the final gain or loss, because the two prices, the one you agreed and the one you later closed at, determine the outcome. Exiting early does not guarantee a profit or prevent a loss.
How does cash settlement work?
Most futures are cash settled, so the money moves but the asset does not. Here is a hypothetical example with invented figures, for illustration only:
Suppose a buyer and seller agree on a contract for 100 units at ₹500 per unit, expiring in three months. On expiry, the market price is ₹520. The buyer gains ₹20 per unit, or ₹2,000 in total (100 × ₹20). The seller pays that ₹2,000 to the buyer. Neither party delivers or receives any of the asset.
If the expiry price had been ₹480 instead, the seller would receive ₹2,000 from the buyer. The arithmetic runs in both directions, which is the point of a futures contract: it transfers price risk, not just a product.
What happens under physical delivery?
Some contracts are settled by physical delivery. At expiry, the buyer must take delivery of the underlying asset, and the seller must provide it. The full value of the asset changes hands, not just the difference in price.
Using the same invented figures: 100 units at the agreed ₹500 is ₹50,000. If the expiry price is ₹520, the buyer pays ₹50,000 and receives 100 units, which are then worth ₹52,000 at market. The catch is practical: a buyer who has agreed to physical delivery must be ready to pay the full amount and handle the asset itself.
Who stands behind the trade?
The exchange acts as an intermediary and guarantees settlement. This means that if one party fails to honour its side, the exchange is still the counterparty, which reduces the risk of default.
The guarantee has limits. It protects you against the other party not paying. It does not protect you against the price moving against your position. A guaranteed loss is still a loss.
Who uses futures, and why?
Hedgers use futures to lock in a price and reduce price risk. A business that expects to buy 100 units in three months might fix today’s price, so a later rise does not raise its cost. The hedger gives up the chance of a better price in exchange for certainty.
Speculators take the opposite view. They bet on price moves and aim to profit from them, without needing the asset for their own use. A speculator who expects the price to rise buys the contract, and loses money if the price falls. Speculation is not wrong in itself, but it is the side of the market where losses are most directly tied to a wrong guess.
What are the catches?
The main catch is that a futures contract is a commitment, not an option. Both parties must settle, whichever way the price moves. A buyer can lose if the price falls, and a seller can lose if it rises, as the examples above show.
Standard terms also limit flexibility, and early exit depends on finding a willing counterparty or taking an offsetting position at the prevailing price. Understanding how settlement works, whether cash or physical, is the first step to knowing what you would actually owe or receive.
Sources and last check
Facts in this article were checked against the sources below on 1 November 2026. Rules and figures can change; check the primary source before acting.
- groww.in (broker education)
- kotakneo.com (broker education)
- dhan.co (broker education)
- icicidirect.com (broker education)
- zerodha.com (broker education)
- upstox.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.
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