CFA level 1 Study Notes Key concepts - Future Market and Contracts

Compared to forward contracts, future contracts:

• Are more liquid and trade on exchanges.
• Do not have counterparty risk ; the clearinghouse acts as counterparty.
• Have lower transaction costs.
• Are standardized contracts and cannot be customized.

1. Futures contracts have a buyer (the long) and a seller (the short), have prices determined by open outcry on the exchange floor, and are standardized as to asset quantity, quality, settlement dates, and delivery requirements.
2. Futures margin deposits are not loans, but deposits to insure performance under the terms of the contract.
3. Initial margin is the deposit required to initiate a future positions ; maintenance margin is the minimum margin, and balances below this will trigger a requirement to post additional  (variation) margin.
4. Marking -to- Market is the process of adding gains to or subtracting losses from the margin account daily, based on the change in settlement (closing) prices from one day to the next.
5. The marking-to-market adjustment is calculated as the change in contract price per asset unit times the quantity specified in the contract times the number of contracts, all added to (subtracted from) the margin  account of the long(short).
6. Trades can't take place at prices that differ from the previous day's settlement prices by more than the price limit and are said to be limit down (up) when the new equilibrium price is below ( above) the minimum (maximum) price of the day.
7. A futures position can be terminated by : An offsetting trade, entering into an opposite position in the same contracts.Cash payment at expiration. Delivery of the asset specified in the contract.An  exchange for physicals (asset delivery off the exchange). 
8. The short in futures contract may have valuable delivery options that allow a choice of the exact asset to be delivered, the location of delivery, or the date of delivery.
9. Treasury bill contracts are quoted at 100 - annualized discount percent, are for T-bills with a face value of $1,000,000, and and settle in cash.
10. Eurodollar futures contracts are for a face value of $1,000,000, are quoted as 100 - annualized 90- day LIBOR,and settle in cash.
11. Treasury bond contracts are for a face value of $1,000,00, gives the short the choice of bonds to deliver , and use conversion factors to adjust the contract price to the bond that is delivered.
12. Stock index futures have a multiplier that is multiplied by the index to calculate the contract value and settle in cash.
13. Currency futures are for delivery of standardized amounts of foreign currency.