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Futures Market (BAB (Hedge instrument (Issuers of BABs are exposed to risk…

- - - - This is obligation to buy contract item on settlement date at agreed price
    - - they contracted to sell the contracts holder on settlement date at agreed price.
  - - - Long position - offsetting short position.
      - Short position - offsetting long position
      - Offsetting trades close out traders position & result in a P/L depending on difference
      - Cash settlement
        
        Trader can close out position prior to settlement date.
- - - - long position - profit from increase in value
      - Short position - profit form fall in value
  - - - Low cost of trading contracts
      - Limited amount of settlement dates
      - Standardised contracts
- - - - Novation of trades
        
        Clearinghouse is counter party to each transactions
        
        Traders only have obligation to clearinghouse
      - Margin payments
        
        Initial margin
        
        are required from buyer & seller when position is first traded.
        
        Daily resettlement
        
        Daily margin payments are required from losing side when lance in its margin account falls below maintenance level - marking to market. Winners receive margin payments back.