Lesson 2 of 7 · All lessons in this module
- Forward contracts and firm commitments
- Futures contracts and daily settlementVideo lesson
- Swaps as a series of forwardsVideo lesson
- Options and call payoffsVideo lesson
- Put payoffs and the four option positionsVideo lesson
- Credit default swapsVideo lesson
- Forward commitments versus contingent claimsVideo lesson
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.
Unlock this lesson free for 7 days
Create a free account to get 7 days free: every lesson, video and flashcard, and the question bank. No card needed.