Forward contracts call for future delivery of an asset at a currently agreed-on price. The long trader purchases the good, and the short trader delivers it. If the price of the asset at the maturity of the contract exceeds the forward price, the long side benefits by virtue of acquiring the good at the contract price.

A futures contract is similar to a forward contract, differing most importantly in the aspects of standardization and marking to market, which is the process by which gains and losses on futures contract positions are settled daily. In contrast, forward contracts call for no cash transfers until contract maturity.

Futures contracts are traded on organized exchanges that standardize the size of the contract, the grade of the deliverable asset, the delivery date, and the delivery location. Traders negotiate only over the contract price. This standardization increases liquidity and means that buyers and sellers can easily find many traders for a desired purchase or sale.

The clearinghouse steps in between each pair of traders, acting as the short position for each long and as the long position for each short. In this way traders need not be concerned about the performance of the trader on the opposite side of the contract. In turn, traders post margins to guarantee their own performance.

The long position's gain or loss between time 0 and time t is F_t – F₀. Because F_T = P_T, the long's profit if the contract is held until maturity is P_T – F₀, where P_T is the spot price at time T and F₀ is the original futures price. The gain or loss to the short position is F₀ = P_T.

Futures contracts may be used for hedging or speculating. Speculators use the contracts to take a stand on the ultimate price of an asset. Short hedgers take short positions in contracts to offset any gains or losses on the value of an asset already held in inventory. Long hedgers take long positions to offset gains or losses in the purchase price of a good.

The spot-futures parity relationship states that the equilibrium futures price on an asset providing no service or payments (such as dividends) is F₀ = P₀ (1 + r_f )^T. If the futures price deviates from this value, then market participants can earn arbitrage profits.

If the asset provides services or payments with yield d, the parity relationship becomes F₀ = P₀ (1 + r_f – d )^T. This model is also called the cost-of-carry model, because it states that futures price must exceed the spot price by the net cost of carrying the asset until maturity date T.

The equilibrium futures price will be less than the currently expected time T spot price if the spot price exhibits systematic risk. This provides an expected profit for the long position who bears the risk and imposes an expected loss on the short position who is willing to accept that expected loss as a means to shed systematic risk.