Futures contract
A futures contract is an exchange-traded, standardised version of a forward contract, settled through daily marking to market via a clearing house that both sides post margin against, rather than only at maturity.
See it move
A firm buys one futures contract on 1,000 barrels of oil at €70 per barrel. Day one's settlement price rises to €71.50, crediting the margin account (€71.50 − €70.00) × 1,000 = €1,500. Day two's price falls to €70.80, debiting (€70.80 − €71.50) × 1,000 = −€700. The net two-day change, +€800, matches the entry-to-date move exactly.
The formula
Variables
- Today's settlement price (€)
- Yesterday's settlement price (€)
- Contract size (units)
- Number of contracts (contracts)
The cash amount credited to (or debited from) a long futures position's margin account at the end of each trading day.
Check yourself
An investor holds 2 wheat futures contracts, each for 50 tonnes, bought at a settlement price of €220 per tonne. At the end of the trading day, the settlement price is €225 per tonne. What variation margin is credited to, or debited from, the investor's margin account?