A Futures Contract is a derivative product and is an agreement to buy or sell a commodity, currency or other instrument at a predetermined price at a specified time in the future. They are either physically settled or cash settled.
Futures contracts do not require traders to post 100% of collateral as margin
Mechanics of Futures Markets
When trading futures contracts, a trader needs to be aware of several mechanics of the futures market. The key components a trader needs to be aware of are:
1.Multiplier: How much is one contract worth? You can see this information under the Contract Specifications for each instrument.
2.Position Marking: Futures contracts are marked according to the Fair Price Marking method. The mark price determines Unrealised PNL and liquidations.
3.Initial and Maintenance Margin: These key margin levels determine how much leverage one can trade with and at what point liquidation occurs.
4.Settlement: How and when the futures contract expires, or settles, is important for traders to understand. employs an averaging over a period of time prior to settlement to avoid price manipulation. This time frame may vary from instrument to instrument and traders should read the individual contract specifications to see when is expiry and the individual settlement procedure.
5.Basis: The basis refers to what premium or discount the futures contract trades at when compared to the underlying spot price and is usually quoted as an annualised %. Basis exists since futures contracts expire in the future and there is either a positive or negative time value element attached to that expiry uncertainty.