Futures & Forwards
Before options bend payoffs into hockey sticks, learn the straight-line derivative — a promise to trade later at a price fixed today. Lock a price, settle daily, and meet contango.
The first derivatives, demystified — what a forward contract is, why its payoff is a straight, symmetric line, how exchange-traded futures differ from private forwards, margin and daily mark-to-market, basis, contango and backwardation, hedgers versus speculators, cost-of-carry pricing, and how to roll contracts forward. Worked numbers, payoff diagrams, and a margin-call simulator throughout.
You can already buy an asset today at today’s price. This course is about the other deal: agreeing today on a price to trade later — the simplest derivative there is, and the foundation every option is built on.
A forward is just a handshake: “I’ll buy your barrel of oil in three months for $80, whatever the price turns out to be.” A future is the same idea, scrubbed clean and run through an exchange so strangers can trust it. Both have the most honest payoff in finance — a straight, symmetric line: every dollar one side gains, the other loses.
You’ll learn:
- What a forward is — the obligation, the payoff line, and why it’s linear and symmetric, unlike the bent payoffs of options.
- Futures vs forwards — how an exchange, a clearing house, and standardisation turn a fragile private promise into something you can trade with anyone.
- Margin & mark-to-market — why futures settle every single day, what a margin call is, and how leverage cuts both ways.
- Cost-of-carry pricing — the no-arbitrage formula that pins the fair forward price to the spot price plus the cost of waiting.
- Contango & backwardation — why the futures curve slopes up or down, and what that does to anyone holding a position over time.
- Hedgers, speculators & rolling — who’s transferring risk, who’s renting it, and how you keep a position alive past its expiry.
Finish this and options-basics clicks into place: once you’ve felt a straight
payoff in your hands, the moment a payoff bends — the whole point of an option —
becomes impossible to miss.
In this topic
- 1 What a Forward Is: A Price Locked Today The simplest derivative there is: a forward contract — a binding agreement to trade an asset later at a price fixed now. Why it's an obligation (not a choice), why its payoff is a straight, symmetric line, how the long and short sides mirror each other dollar for dollar, and why a forward costs nothing to enter — with worked payoffs, a draggable payoff diagram, and the trap that separates forwards from options. 16 min
- 2 Futures vs Forwards: Standardising the Handshake How a fragile private forward becomes a bullet-proof exchange-traded future: standardisation of size, quality and dates; the clearing house that becomes everyone's counterparty and erases default risk; daily mark-to-market; and the resulting differences in liquidity, customisation and credit risk. With a side-by-side table, worked counterparty-risk reasoning, and the one place forwards still win. 16 min
- 3 Margin & Mark-to-Market: Settling Every Day How a futures account actually works day to day: initial vs maintenance margin, daily mark-to-market sweeping variation margin in and out, what triggers a margin call and how you cure it, and why margin makes futures a leverage machine that magnifies gains and losses alike. With a step-through margin-call simulator, full worked daily ledgers, leverage arithmetic, and the trap of confusing margin with a down payment. 18 min
- 4 Cost-of-Carry Pricing: Why the Forward Price Is What It Is The no-arbitrage logic that pins the fair forward price: forward = spot grown by the cost of carry (financing + storage − income/convenience yield). The replication argument, the cash-and-carry and reverse cash-and-carry arbitrages that enforce it, worked examples for a financial asset, a dividend-paying stock, and a storable commodity, plus a slider that builds the forward price piece by piece. 18 min
- 5 Basis, Contango & Backwardation: Reading the Curve The shape of the futures curve and what it does to you over time: the basis (spot minus futures) and how it must converge to zero at expiry, contango (upward curve) versus backwardation (downward curve), the roll yield that quietly bleeds or feeds a held position, basis risk for imperfect hedges, and why a commodity ETF can fall while spot rises. With a toggleable curve, worked roll-yield arithmetic, and convergence diagrams. 18 min
- 6 Hedgers, Speculators & Rolling the Position Who actually trades futures and why: hedgers transferring unwanted price risk and the certainty-for-upside trade they make, speculators and arbitrageurs renting that risk and providing the liquidity that makes hedging possible, long vs short hedges, and the mechanics of rolling a position forward across expiries (with the roll cost in contango vs backwardation). With a hedge-lock chart, worked producer/consumer hedges, and the trap of calling all speculation 'gambling'. 17 min
- 7 Final Exam: Futures and Forwards The graded final exam for Futures and Forwards: forward contracts and their straight-line payoff, futures vs forwards and the clearing house, margin and daily mark-to-market, cost-of-carry pricing and arbitrage, basis, contango and backwardation, roll yield, and hedgers versus speculators. 16 min
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