Lesson 2 of 7 · 13 min
Futures contracts and daily settlement
A futures contract is a standardized forward traded on an exchange, where a clearinghouse settles gains and losses every day through margin accounts and guarantees performance.
In short
- Futures have standardized sizes, dates and underlyings set by the exchange, which gives liquidity and removes most default risk.
- Every day the clearinghouse marks to market: it sets a settlement price and moves that day's gain or loss between the buyers' and sellers' margin accounts.
- Both sides post initial margin. If the account falls below the maintenance margin, a margin call requires a deposit (variation margin) back up to the initial margin.
- The total gain or loss equals a forward's, for the buyer; only the timing of the cash flows differs.
- Exchanges may add price limits or circuit breakers. Positions are usually closed by an offsetting trade before expiry.
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