The price of a futures contract is just the spot price of an underlying asset that is adjusted for time, interest, and paid out dividends. The difference between the futures price and spot price forms the basis of spread. At the beginning of the series, the spread is maximum, but soon it converges into the settlement date. The future prices and spot price of an underlying asset are equal at the time of the expiration date.
- Clearing House
- Buying Vs. Selling Future Contracts
- Margin Requirement
- Marking to Market
In an active market, futures are traded through an exchange which is called a clearinghouse. In India, National Stock Exchange Limited (NSE) participates in futures trading through the future index.
Futures are legal and standardized agreements. In the future, the buyer generally has a long position while the seller has a short position.
Margin means the total amount that is deposited in the clearinghouse by the parties. When the time comes, it acts as a guarantee that all parties will honor this contract.
At the starting of the trade, both parties have to deposit a margin. Due to the market process, if the starting margin falls drastically down than the maintenance amount, the part will receive a margin call.
Marking to market is a process in which future prices are settled daily. The rise and fall of future prices are because of active trading. After each trading, clearing houses have adopted to pay the price difference by crediting and debiting the margin amount from the differential amount deposited by the parties.
