Markets

How Futures Contracts Work, Explained With an Example

Astron Team · 09/24/2026 · 6 min read

Futures contracts have been around for much longer than most people imagine: the idea was born from the need of farmers and grain buyers to lock in a price ahead of time, even before the harvest. Today, the same mechanism is used for stocks, indices, currencies, and interest rates, far beyond the farm.

Understanding this logic helps make sense not only of who uses futures contracts to speculate, but also why entire companies rely on them to protect themselves from price swings.

What a futures contract is

A futures contract is a standardized agreement to buy or sell a specific quantity of an asset, on a set future date, at a price agreed today. Unlike a trade in the spot market, where the exchange happens almost immediately, in the futures market the price is locked in now, but settlement happens later.

These contracts are traded on specific exchanges, which standardizes details like the asset's quantity, expiration date, and settlement method, making it possible for unrelated buyers and sellers to trade with each other safely.

What they're for: hedging and speculation

Futures contracts were born for price protection, but today they serve two very different groups:

• Hedging (protection): a soybean producer can sell futures contracts on their own crop before the harvest, locking in a selling price and protecting themselves from a possible drop by then. On the other side, a company that buys soybeans as an input can buy futures contracts to lock in its cost, protecting itself from a possible rise.
• Speculation: investors with no physical relationship to the asset trade futures contracts betting on the price direction, seeking to profit from the change, with no intention of delivering or receiving the physical product.

Margin: why you don't need the contract's full value

One of the features that most attracts (and also most worries) people who start trading futures contracts is the margin requirement. Instead of paying the contract's full value, the trader deposits only a fraction of it as collateral, called the initial margin.

This creates leverage: with a relatively small amount, it's possible to control a much larger position. Leverage amplifies both gains and losses in the same proportion, which demands extra discipline in risk management.

A simple numerical example

Imagine a futures contract on a given index, with a notional value of R$ 50,000, requiring an initial margin of 10%, or R$ 5,000. If the contract's value rises 4%, the gross gain is R$ 2,000 (4% of R$ 50,000). On the R$ 5,000 margin deposited, that represents a 40% return.

But the same math works the other way: if the contract's value falls 4%, the loss is also R$ 2,000, which represents 40% of the deposited margin. It's this amplification, on both sides, that makes risk management essential when trading futures contracts.

Daily settlement: the detail that catches beginners off guard

Unlike a stock that's bought and held, futures contracts usually go through a process called daily settlement: at the end of each trading session, the day's gain or loss is calculated and actually credited to or debited from the trader's account, even if the contract hasn't expired yet.

This means that, over a run of losing days, the account balance keeps shrinking day after day, not just at the position's final closing. If the available margin falls below a required minimum level, it may be necessary to deposit more money to keep the position open, which is called a margin call.

Expiration: the contract has a shelf life

Every futures contract has an expiration date. Before it arrives, the trader needs to decide between closing the position or, in some cases, rolling it into a contract with a later expiration. This is different from buying a stock, which can be held indefinitely with no expiration date.

What to take away as a practical lesson

Futures contracts are powerful tools for both protection and speculation, but the leverage built into them demands respect. Before trading, it's worth clearly understanding the contract size, the required margin amount, and what happens during daily settlement.

Setting an acceptable loss limit in advance for each trade, rather than just relying on the expectation of a gain, is a basic practice for anyone trading this type of instrument responsibly. As with any leveraged trade, there's real risk of a loss larger than the amount initially deposited as margin, depending on the instrument and the contracted conditions.