Unlike futures, futures contracts are standardized. Forwards are similar types of agreements that currently block a future price, but forwards are traded over the counter and have customizable terms that are reached between counterparties. On the other hand, futures contracts are subject to the same conditions, regardless of the other. The exchange also guarantees compliance with the contract, which excludes the counterparty risk. Each exchange-traded futures contract is billed centrally. This means that when a futures contract is purchased or sold, the exchange becomes a buyer for each seller and seller for each buyer. This significantly reduces the credit risk associated with the failure of an individual buyer or seller. Parties wishing to buy or sell futures contracts are required to hold a margin on the stock exchange. It gives the Stock Exchange the assurance that they have the means to honour their commitment in the event of unfavourable price movements. The Futures Industries Association (FIA) estimates that 6.97 billion futures contracts were traded in 2007, an increase of almost 32% over 2006. For example, a crude oil futures contract is 1,000 barrels of oil.
At $75 per barrel, the face value of the contract is $75,000. A merchant is not required to put this amount into an account. On the contrary, the initial margin for a crude oil contract could be approximately $5,000 per contract, as determined by the stock exchange. This is the initial amount that the trader must place in the account to open a position. Similarly, a rise in market moods would lead to a decline in the forward price of the asset. In order to reduce the risk of failure, the product is put on the market every day, the difference between the initially agreed price and the actual daily price being reassessed daily. Sometimes it is a margin of variation in which the futures exchange derives money from the margin account of the losing party and moves into the other party`s margin to ensure that the good loss or profit is reflected on a daily basis. If the Margin account falls below a certain value defined by the exchange, a margin call is made and the account holder must replenish the margin account.
In many cases, options are traded over futures, sometimes simply as „future options.“ A put is the option to sell a futures contract, and a call is the option to buy a futures contract. For both, the option strike price is the indicated forward price, at which the future is negotiated when the option is exercised. Futures are commonly used because they are Delta One instruments. Calls and forward options can be evaluated in the same way as for assets traded with an extension of the Black Scholes formula, the Black model. In the case of forward options for which the premium is only due when it is running, positions are commonly referred to as „Fution“ because they behave like options, but stand out as futures. In this case, carry cost refers to the cost of holding the asset until the futures contract matures.
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