Futures and options trading involve substantial risk of loss and may possibly not be suitable for everybody. The valuation of futures and options may possibly fluctuate and as a result, clients may lose much more than their original investment. In no event should the content of this site be construed as an express or implied promise, guarantee, or implication by or from The Price Futures Group, Inc. that you will profit or that losses can or will be limited in any manner whatsoever. Past performance isn’t indicative of future outcomes.
Futures traders are traditionally placed in one of two groups: hedgers , who have an interest in the underlying asset (which could consist of an intangible like an index or interest rate) and are seeking to hedge out the risk of price changes; and speculators , who seek to make a profit by predicting market moves and opening a derivative contract related to the asset “on paper”, whilst they have no practical use for or intent to really take or make delivery of the underlying asset. In other words, the investor is seeking exposure to the asset in a long futures or the opposite effect via a short futures contract.
A futures account is marked to market every day. If the margin drops below the margin maintenance requirement established by the exchange listing the futures, a margin call will likely be issued to bring the account back up to the required level.
The margining of futures eliminates a lot of this credit risk by forcing the holders to update every day to the price of an equivalent forward bought that day. This means that there will generally be extremely little additional money due on the final day to settle the futures contract: only the final day’s gain or loss, not the gain or loss over the life of the contract.
Example: Consider a futures contract with a $100 price: Let’s say that on day 50, a futures contract with a $100 delivery price (on the exact same underlying asset as the future) costs $88. On day 51, that futures contract costs $90. This means that the “mark-to-market” calculation would need the holder of 1 side of the future to pay $2 on day 51 to track the changes of the forward price (“post $2 of margin”). This cash goes, via margin accounts, to the holder of the other side of the future. That is, the loss party wires cash to the other party.
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