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Derivatives (Futures (Trading (1) A buyer and a seller agree to deal the…
Derivatives
Futures
A standardised exchange-traded contract to trade a specified asset at a certain future time at an agreed price.
Trading
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2) Opposing contracts are created between each party and the clearing house of the exchange (who act as counterparty to both trades)
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4) Contract is marked to market daily, which may result in variation margin being payable
5) Most positions in futures markets are closed out before delivery by taking an opposite position (known as closing out a futures position)
Margin
Collateral the each party to futures contract must deposit with clearing house- acts as cushion against potential losses that parties may suffer from future adverse price movements
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Changed on daily basis to ensure that clearing house's exposure to credit risk is controlled- known as marking to market.
Fall in value is topped up with payments of variation margin, to enable clearing house to continue to give its guarantee.
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