Futures margin mechanics | Finance & Capital Markets | Khan Academy | Summary and Q&A

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March 22, 2011
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Futures margin mechanics | Finance & Capital Markets | Khan Academy

TL;DR

Futures contracts require buyers and sellers to put up initial margin to secure the contract, and if the market moves against them, their margin account is adjusted to maintain fairness.

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Questions & Answers

Q: What is a futures contract?

A futures contract is an agreement to buy or sell a certain amount of goods at a future date for a predetermined price.

Q: What is the initial margin in a futures contract?

The initial margin is the amount of money that both the buyer and the seller have to put up to secure the futures contract.

Q: How does market to market work in futures contracts?

Market to market is a process where the exchange adjusts the futures contract's delivery price based on the current market price. This ensures fairness between buyers and sellers.

Q: What happens if the market price moves against a futures contract holder?

If the market price decreases, the buyer may feel disadvantaged, while the seller may benefit. The futures contract is adjusted, and the margin accounts of both parties are modified to reflect the new price.

Summary & Key Takeaways

  • Futures contracts involve buying or selling a specific amount of goods at a future date at a predetermined price.

  • Initial margin is required from both parties, which is either a fixed amount or a percentage of the delivery price.

  • If the market price changes, the futures contract is adjusted through the process of market to market, and margin accounts are modified accordingly.

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