A futures contract is an agreement between a buyer or seller of the contract and a futures exchange in which the buyer or seller agrees to take or make delivery of a specific amount of a particular instrument or commodity, at a specific price, at a specified time.

All futures are exchange traded contracts and they are standardised in terms of the delivery date, the amount of the 'underlying' they relate to, and the contract terms. Futures contracts can also be freely bought and sold before the contract expires.

When an investor buys a futures contract, the investor is said to be long the futures. Buying (going long) a future commits you to buying the underlying at a future date.

Let’s look at an example.

Suppose that X buys (and Y sells) a futures contract on an 6% 5-year Treasury note for settlement one year from now.

The futures price is $100. In other words, X agrees to buy the Treasury note for $100 in one years time and Y agrees to sell X the note for $100.

The profit or loss for the parties (for X and Y) obviously depends on the price of the note in one years time. So, if the market price of the note in one years time is $110 the buyer profits (because they can buy a $110 note for $100), and the seller loses (because they must sell a $110 note to the buyer for $100).

If, on the other hand, the market price of the note in one years time is $90, the seller of the contract profits (because they can sell a $90 note for $100), and the buyer loses (because they must buy a $90 note for $100).

If an investor sells a futures contract, they are said to be short the futures.Selling (shorting) a future commits you to selling the underlying at a future date.

Of course, this is effectively the other side of our example.

Y has sold a futures contract on an 6% 5-year Treasury note for settlement one year from now at a futures price of $100. As we have seen, if the market price of the note in one years time is $90, the seller of the contract profits (because they can sell a $90 note for $100), and the buyer loses (because they must buy a $90 note for $100).

But, as we have also seen, if the market price of the note in one years time is $110 the buyer profits (because they can buy a $110 note for $100), and the seller loses (because they must sell a $110 note to the buyer for $100).