Options & Derivatives

Futures Contract

An exchange-traded forward that is margined and settled daily.

Economically similar to a forward, with one important mechanical difference: daily margining.

Consequences: almost no counterparty credit risk; a small pricing difference from forwards when interest rates are correlated with the asset price, because the timing of cash flows matters; and a live operational concern, since you can be directionally right and still face margin calls that force liquidation.

For interview purposes: "essentially the same price, but daily settlement creates a convexity adjustment when rates and price are correlated" is complete.

Full guide

Forwards, Futures and the Cost of Carry

Why the forward price is not a forecast, how carry determines it, and the difference futures margining makes.

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