A futures contract is a standardized legal agreement to buy or sell a particular commodity or asset at a predetermined price at a specified time in the future.
Dates are tied to the expiration month to give a distinctive description. For instance, December Bitcoin futures refer to BTC futures contracts expiring in December.
Notably, futures trading platforms offer leverage functionalities. As such, traders only need a percentage of the total contract value, and the rest is leveraged or borrowed from the platform. The required initial amount is called a margin. A trader's reputation on creditworthiness and a trading platform's conditions on leveraged trading determine the margin.
During maturity, a futures contract can be physically settled or cash-settled. Physically-settled futures refer to a type of futures where the underlying asset is exchanged during expiry.
On the other hand, a cash-settled futures contract is used to describe a contract where, upon maturity, the underlying asset is settled by first converting it to cash.
A common term in futures is “tick.” This is the slightest price movement of a futures contract during a 24-hour period. Note that a tick can indicate an increase or decrease in price.
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