What you will learn
- Use contract units rather than the deposit to measure exposure.
- Distinguish a futures price from a spot quotation.
Futures
The exchange sets the contract size, tick size, expiry months and settlement method. Some contracts end in physical delivery, such as certain commodities, while others, such as stock index futures, settle in cash, so delivery is not universal. Most speculative traders close positions before expiry.
Gains and losses are credited or debited daily as variation margin. Unlike an option buyer, both the long and the short carry an obligation, so losses can exceed the initial margin. The futures price is linked to the spot price through carrying costs, and the gap between them, the basis, tends to narrow as expiry approaches.
Spot Price
Spot prices come from trading in the physical or cash market, so they depend on grade, delivery location and timing. Many published spot figures are benchmark assessments or the nearest available contract rather than a single executable quote, which is why different sources can show slightly different values.
Futures prices relate to the spot price through the cost of carry: financing, storage, insurance and the convenience of holding physical stock. The gap between them is the basis, and it narrows toward zero as a futures contract nears expiry because its final settlement is tied to the spot market.
Commodity
Commodities are usually grouped as energy, metals, agriculture and livestock. Prices are driven by physical supply and demand, weather, inventories, transport and storage costs, currencies and policy, so shocks can be sudden and regional.
Many financial participants gain exposure through futures, exchange-traded products or related company shares rather than by holding physical goods. These routes can behave differently from the spot market because of contract expiry, rolling, fees, and the fact that a miner's or producer's share price also reflects costs and management.
Worked example: A multiplier changes the scale
Illustrative: a fictional futures contract is quoted at 2,000 points with a multiplier of HK$50 per point. Notional is HK$100,000. A 10-point move changes the value of one long contract by HK$500 before costs, regardless of whether the initial deposit was HK$8,000 or another amount. Settlement design must be read from the contract, not inferred from its name.
Check your understanding
At 1,500 points and HK$20 per point, what is one contract’s notional value?
Show answer and explanation
1,500 × 20 = HK$30,000. A smaller collateral deposit does not reduce that price exposure or cap losses at the deposit.