Futures contract

A future does the same economic job as a forward, fixing a price today for a transaction later, but it does it through an exchange. Contract size, delivery month, quality grade and delivery point are all set by the exchange rather than negotiated, and the counterparty on every trade is a central clearing house rather than the firm on the other side.

Standardisation is what makes the market liquid and the price public, which matters. A published futures curve is the reference everyone in a commodity market prices against, including companies that never trade a single contract. It is also why futures are the natural instrument in commodities such as oil, gas and metals, where the exchange market is deep, while corporate currency hedging is dominated by bilateral forwards.

The same standardisation creates the two features a candidate should be able to name. Basis risk, because the exposure is a specific grade at a specific place in a specific month and the contract is a benchmark, so the two never move together perfectly. And variation margin, because the clearing house settles every position in cash each day, so a losing position has to be funded immediately rather than at maturity.

That second feature is the one that surprises people, and it is worth stating plainly: a hedge can be economically correct, on track to offset the exposure exactly, and still consume cash for months before the offsetting benefit shows up in the physical business. Sizing that funding requirement in advance is part of designing the hedge, not an afterthought.