CFA Level 1 - Derivatives - Futures and Margin Money ( Chapter #4)
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Futures Contracts:
Futures contracts are standardized financial derivatives that obligate two parties to buy or sell an underlying asset at a predetermined price (the futures price) on a specified future date. These contracts are widely used in financial markets for various purposes, including hedging, speculation, and investment. Here is a more detailed description of futures contracts:
Key Components of Futures Contracts:
Underlying Asset: Futures contracts are based on underlying assets, which can include commodities (e.g., oil, corn), financial instruments (e.g., stock market indices, interest rates), or currencies.
Contract Terms: Unlike forward contracts, futures contracts are standardized in terms of contract size, maturity date, and other specifications. This standardization makes them exchange-traded and more liquid.
Exchange-Traded: Futures contracts are typically traded on organized exchanges, where buyers and sellers come together to execute transactions. The exchange acts as an intermediary, ensuring the fulfillment of contract terms.
Daily Settlement: Unlike forward contracts, futures contracts often have daily settlement or margin requirements, meaning that profits and losses are marked to market daily, and parties must post collateral (margin) to cover potential losses.
Leverage: Futures contracts typically require a relatively small initial margin deposit, allowing traders to control a larger position. This leverage magnifies both potential gains and losses.
Expiration: Futures contracts have specified expiration dates when the contract is settled. Depending on the contract type, settlement can be in cash or physical delivery of the underlying asset.
Margin Money:
Margin money, also known as margin or initial margin, is a sum of money that traders and investors are required to deposit with a broker or exchange when entering into a futures contract. Margin serves several important purposes:
Risk Management: Margin acts as a performance bond to ensure that both parties involved in a futures contract fulfill their obligations. It helps mitigate the risk of one party defaulting on their obligations.
Daily Settlement: In futures trading, profit and loss are marked to market daily. If a trader incurs a loss, they need to cover that loss by posting additional margin. This helps ensure that traders can meet their financial obligations throughout the life of the contract.
Leverage: Margin allows traders to control a larger position with a relatively small amount of capital. This leverage magnifies potential profits, but it also increases the risk of significant losses.
Maintaining Open Positions: As long as a trader maintains an open position in a futures contract, they must ensure that their margin account remains adequately funded to cover potential losses.
It's essential for traders and investors to understand the concept of margin and margin requirements when trading futures. Failure to meet margin calls can result in the forced liquidation of positions, potentially leading to significant financial losses. Margin requirements and maintenance levels can vary depending on the contract, the exchange, and market conditions, so it's crucial to stay informed and manage margin responsibly to participate in futures trading.
https://b3rr.short.gy/cfa-playlist
Futures Contracts:
Futures contracts are standardized financial derivatives that obligate two parties to buy or sell an underlying asset at a predetermined price (the futures price) on a specified future date. These contracts are widely used in financial markets for various purposes, including hedging, speculation, and investment. Here is a more detailed description of futures contracts:
Key Components of Futures Contracts:
Underlying Asset: Futures contracts are based on underlying assets, which can include commodities (e.g., oil, corn), financial instruments (e.g., stock market indices, interest rates), or currencies.
Contract Terms: Unlike forward contracts, futures contracts are standardized in terms of contract size, maturity date, and other specifications. This standardization makes them exchange-traded and more liquid.
Exchange-Traded: Futures contracts are typically traded on organized exchanges, where buyers and sellers come together to execute transactions. The exchange acts as an intermediary, ensuring the fulfillment of contract terms.
Daily Settlement: Unlike forward contracts, futures contracts often have daily settlement or margin requirements, meaning that profits and losses are marked to market daily, and parties must post collateral (margin) to cover potential losses.
Leverage: Futures contracts typically require a relatively small initial margin deposit, allowing traders to control a larger position. This leverage magnifies both potential gains and losses.
Expiration: Futures contracts have specified expiration dates when the contract is settled. Depending on the contract type, settlement can be in cash or physical delivery of the underlying asset.
Margin Money:
Margin money, also known as margin or initial margin, is a sum of money that traders and investors are required to deposit with a broker or exchange when entering into a futures contract. Margin serves several important purposes:
Risk Management: Margin acts as a performance bond to ensure that both parties involved in a futures contract fulfill their obligations. It helps mitigate the risk of one party defaulting on their obligations.
Daily Settlement: In futures trading, profit and loss are marked to market daily. If a trader incurs a loss, they need to cover that loss by posting additional margin. This helps ensure that traders can meet their financial obligations throughout the life of the contract.
Leverage: Margin allows traders to control a larger position with a relatively small amount of capital. This leverage magnifies potential profits, but it also increases the risk of significant losses.
Maintaining Open Positions: As long as a trader maintains an open position in a futures contract, they must ensure that their margin account remains adequately funded to cover potential losses.
It's essential for traders and investors to understand the concept of margin and margin requirements when trading futures. Failure to meet margin calls can result in the forced liquidation of positions, potentially leading to significant financial losses. Margin requirements and maintenance levels can vary depending on the contract, the exchange, and market conditions, so it's crucial to stay informed and manage margin responsibly to participate in futures trading.
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