Futures contracts, daily settlement and margin calls
Futures are standardized forwards traded on an exchange. Gains and losses are settled every day through margin accounts, so counterparty risk is small. If your balance falls below the maintenance margin, you must deposit enough to restore it to the initial margin, not just to the maintenance level.
Before this: Forward contracts: payoff for the long and the short
On the exam
- Define forward contracts, futures contracts, swaps, options (calls and puts), and credit derivatives and compare their basic characteristics
Define futures and compare them with forwards. Expect a margin call amount (often over several days or several contracts), and a question on which features belong only to futures: daily settlement, standardization, a clearinghouse guarantee and price limits.
How deeply to learn each part
- Know the idea
- Understand it in general. It frames other topics, but you will not calculate with it.
- Use it
- Understand it well enough to solve a question with it. Recognize when it applies.
- Memorize
- Learn it by heart. The exam will not give it to you.
You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.
You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.
How do futures differ from forwards?
A futures contract is a forward with standardized size, dates and underlying that trades on a futures exchange. The agreed price is the futures price , f₀(T). The exchange sets the contract terms based on what buyers and sellers want, so every contract is the same. That uniformity, together with an organized market and a central clearinghouse , gives futures more liquidity and much better protection against default than a forward, which trades over the counter (OTC).
| Forward | Futures | |
|---|---|---|
| Where | OTC | exchange |
| Terms | customized | standardized |
| Gains and losses settled | at expiration | daily (mark to market) |
| Counterparty risk | bilateral | clearinghouse guarantee, margin |
| Closing early | offsetting contract with the dealer | trade the same contract on the exchange |
| Regulation and transparency | lighter | heavier; prices public |
At expiration a futures contract settles on the same difference as a forward: S_T − f₀(T) for the long. If the two have the same terms, the final payoff profile is the same. The difference is when the cash moves, and that is the whole point of the next section.
- Daily settlement Memorize losses cannot build up
- Margin Memorize collateral posted by both sides
- Clearinghouse guarantee Memorize backed by its insurance fund
- Price limits and circuit breakers Use it cap how far a price can jump in a day
How does daily settlement work?
At the end of every trading day the clearinghouse takes an average of the final prices of the day and calls it the settlement price . All contracts are then valued at that price. This process is called daily settlement , or mark to market (MTM) . Each day the long gains if the settlement price rose and loses if it fell, and the short has the opposite result.
The money moves through each party’s margin account, held at the exchange. The clearinghouse credits the account of the side with the gain and debits the side with the loss, so a loss is paid for immediately, not at expiration. That is why the clearinghouse’s guarantee is cheap to provide: losses never get large before they are collected.
How does the margin account work?
No cash changes hands for the price when a futures position is opened, as with a forward. Instead each side must deposit a minimum amount with the exchange.
- The initial margin is the deposit required to open the position.
- The maintenance margin is the minimum balance that must be held from then until settlement. It is set below the initial margin.
- The variation margin is the deposit that restores the balance after it has fallen below maintenance.
- Initial margin Memorize deposit to open the position
- Maintenance margin Memorize the floor, set below initial; falling under it triggers a call
- Variation margin Memorize the deposit that restores the balance to initial
If the balance falls below the maintenance margin, the exchange issues a margin call : a request to deposit funds at once. The amount must bring the account back to the initial margin, not to the maintenance level.
If a margin call is not met, the position must be closed out as soon as possible and the holder covers any further losses. If the holder cannot pay, the clearinghouse covers the loss from its insurance fund. That is the guarantee.
An investor opens a long position in 2 futures contracts of 5000 units each, depositing the initial margin of 9,500.00 per contract. The maintenance margin is 8,500.00 per contract. On the first day the settlement price falls by 0.35 per unit. The variation margin the investor must deposit is closest to:
Balance = 19,000.00 − 2 × 5000 × 0.35 = 15,500.00. Below 17,000.00, so refill to 19,000.00: call = 3,500.00
Variation margin to deposit, V3,500.00
- 2×5000×0.35=loss 3,500.00
- +|-+19000=balance 15,500.00 against maintenance 17,000.00
- 19000−15500=call 3,500.00
+|- change sign
- 2ENTER5000×0.35×loss 3,500.00
- CHS19000+balance 15,500.00 against maintenance 17,000.00
- 19000ENTER15500−call 3,500.00
ENTER enter (on the HP, puts the number on the stack) · CHS change sign
Try this 0 of 3
- Change the day 1 settlement price so the long gets no call that day
- Trigger a margin call on the last day
- Switch to the short side and compare the ending balance
Your position
Settlement prices (USD per oz)
Bars: the balance after each day's settlement. A dashed red cap is the margin call that tops the account back up to the initial level.
2 margin calls, USD 7,000 in all. Each time the balance fell below USD 17,000, it was refilled to USD 19,000, not to USD 17,000.
| Day | Settle | MTM | Before call | Call | End |
|---|---|---|---|---|---|
| 0 | 30.00 | 19,000 | |||
| 1 | 29.65 | −3,500 | 15,500 | 3,500 | 19,000 |
| 2 | 29.30 | −3,500 | 15,500 | 3,500 | 19,000 |
| 3 | 29.85 | +5,500 | 24,500 | 0 | 24,500 |
| 4 | 29.45 | −4,000 | 20,500 | 0 | 20,500 |
Show working
Position: 2 × 5,000 = 10,000 units. Initial margin 2 × 9,500 = 19,000; maintenance 2 × 8,500 = 17,000.
Day 1: (29.65 − 30.00) × 10,000 = −3,500; 19,000 − 3,500 = 15,500, below 17,000, so call 19,000 − 15,500 = 3,500; ending 19,000.
Day 2: (29.30 − 29.65) × 10,000 = −3,500; 19,000 − 3,500 = 15,500, below 17,000, so call 19,000 − 15,500 = 3,500; ending 19,000.
Day 3: (29.85 − 29.30) × 10,000 = +5,500; 19,000 + 5,500 = 24,500, not below 17,000: no call.
Day 4: (29.45 − 29.85) × 10,000 = −4,000; 24,500 − 4,000 = 20,500, not below 17,000: no call.
Check: total MTM = (29.45 − 30.00) × 10,000 = −5,500; 19,000 + 7,000 − 5,500 = 20,500.
- 29.65−30=−0.35 per unit for the long
- ×10000=−3500, the daily MTM
- 19000−3500=15500, the balance
- 19000−15500=3500, the margin call
- 29.65ENTER30−−0.35 per unit for the long
- 10000×−3500, the daily MTM
- 19000ENTER3500−15500, the balance
- 19000ENTER15500−3500, the margin call
ENTER enter (on the HP, puts the number on the stack)
Exam tip Two checks catch most margin errors: compare the balance with maintenance (total, not per contract), and if there is a call, bring it to initial.
What are price limits and circuit breakers?
Exchanges can protect themselves further. They may raise margins or call for margin intraday when a position is large or volatility jumps. Some contracts also have price limits : a band around the previous day’s settlement price outside which no trade may occur. If someone wants to trade beyond the band, trading stops until two parties agree on a price inside it. A circuit breaker is a short pause in intraday trading when a limit is hit.
At expiration the number of contracts still outstanding is the open interest . These are settled by cash or by physical delivery. Most traders close out earlier instead, by taking the opposite position in the same contract; the clearinghouse marks it to the latest price and removes it.
Go deeper Same payoff, different timing
A forward pays all of the gain or loss at expiration. A futures contract pays it in daily instalments. The total over the life is the same, S_T − f₀(T), but money received sooner can be invested sooner, so the two are not strictly equal in value. The difference is small for short maturities and low interest rates, and it is the reason forward and futures prices can differ slightly. The futures pricing module explains the effect.
Go deeper Physical delivery and convergence
A futures contract states whether it settles by physical delivery or in cash. With physical delivery the seller must deliver a specified type, amount and quality of the underlying to a set location, and the buyer must accept and pay. That obligation forces the futures price to converge to the spot price at expiration.
Go deeper Why margin calls create liquidity risk
A holder with a hedge on a futures position may be right on the economics but still need cash within hours when the market moves against the futures leg. Raising that cash in a hurry can force the sale of other assets. The risks of derivatives module returns to this point.
Memorize this
MemorizeFutures vs forwards
| Forward | Futures | |
|---|---|---|
| Where | OTC | exchange |
| Terms | customized | standardized |
| Gains and losses settled | at expiration | daily (mark to market) |
| Counterparty risk | bilateral | clearinghouse guarantee plus margin |
| Closing early | offsetting contract with the dealer | trade the same contract on the exchange |
Memory hook Futures = forwards on a leash: standard, daily, guaranteed.
Know it cold Same payoff shape and (with matching terms) the same total gain. Only the timing of the cash differs.
MemorizeThe margin rule
Memory hook Fall under the floor and you refill to the roof, never to the floor.
Know it cold Balance below maintenance → deposit enough to restore initial. Balance at or above maintenance → no call. Multiply per-contract margins by the number of contracts.
- Initial margin Memorize deposit to open the position
- Maintenance margin Memorize the floor, set below initial; falling under it triggers a call
- Variation margin Memorize the deposit that restores the balance to initial
- Daily settlement Memorize losses cannot build up
- Margin Memorize collateral posted by both sides
- Clearinghouse guarantee Memorize backed by its insurance fund
- Price limits and circuit breakers Use it cap how far a price can jump in a day
Quick example
Long 4 contracts of 250 units. The settlement price rises from 80.40 to 81.10. 0.70 × 250 × 4 = +700.
- 81.1−80.4=×250×4= 700
- 81.1ENTER80.4−250×4× 700
ENTER enter (on the HP, puts the number on the stack)
Quick example
Long 4 contracts of 50 units; initial 3,200 and maintenance 2,600 per contract. A 14.00 fall leaves 12,800 − 2,800 = 10,000, below 10,400. Call = 12,800 − 10,000 = 2,800.
- 4×50×14= loss 2800
- +|-+12800= balance 10000, below 10400
- 12800−10000= call 2800
+|- change sign
- 4ENTER50×14× loss 2800
- CHS12800+ balance 10000, below 10400
- 12800ENTER10000− call 2800
ENTER enter (on the HP, puts the number on the stack) · CHS change sign
Quick example
Buy 1 contract of 100 units at 52.00; the final settlement price is 55.50. (55.50 − 52.00) × 100 = +350 in total, however the daily amounts moved.
- 55.5−52=×100= 350
- 55.5ENTER52−100× 350
ENTER enter (on the HP, puts the number on the stack)
How it is asked
-
Margin call after one move
One contract of 500 units, initial 4,500, maintenance 3,600. The price falls 2.40. Call?
Balance 4,500 − 1,200 = 3,300, below 3,600, so refill to 4,500: 1,200. Traps: 300 (to maintenance) and 900 (initial − maintenance).
-
Several contracts
5 contracts, margins per contract, a modest price fall. Is there a call?
Multiply margins and the loss by 5, then compare. A call only if the balance is below 5 × maintenance.
-
Futures-only feature
Which feature applies to futures but not forwards?
Daily settlement (also standardization and the clearinghouse guarantee).
-
Pause in trading
A futures price hits its daily limit and trading pauses. The exchange is using a…
Circuit breaker. Trap: maintenance margin or novation.
Exam traps
- Topping up only to the maintenance margin. The deposit restores the account to the initial margin.
- Using one contract's margin when the position is several contracts. Scale margins and the daily gain or loss by the number of contracts.
- Saying futures carry more counterparty risk than forwards. Daily settlement, margin and the clearinghouse make it lower.
- Calling a margin call when the balance is still above maintenance. A loss alone does not trigger a call.
Checkpoint
5 exam-style questions. About 90 seconds each.
1An investor is long one futures contract on 1,000 units with initial margin of EUR 6,000 and maintenance margin of EUR 4,400. The settlement price falls by EUR 1.80 on the first day. The variation margin the investor must deposit is closest to:
2Which feature applies to futures but not to forwards?
3When a futures price hits its daily limit and trading is briefly paused, the exchange is using a:
4An investor is long 5 futures contracts on 200 units each. The initial margin is USD 3,000 and the maintenance margin is USD 2,400 per contract. On the first day the settlement price falls by USD 2.50. The variation margin the investor must deposit is closest to:
5Which of the following best explains why futures carry less counterparty risk than forwards?
Key takeaways
- Futures are standardized, exchange-traded forwards that are marked to market every day.
- Initial margin to open; below maintenance, deposit enough to get back to initial.
- The clearinghouse guarantee plus daily settlement keeps counterparty risk low.
- Over the whole life the long gains S_T − f₀(T), as with a forward; only the timing of cash differs.
Quick example
Long 4 contracts of 250 units. The settlement price rises from 80.40 to 81.10. 0.70 × 250 × 4 = +700.
- 81.1−80.4=×250×4= 700
- 81.1ENTER80.4−250×4× 700
ENTER enter (on the HP, puts the number on the stack)
Quick example
Long 4 contracts of 50 units; initial 3,200 and maintenance 2,600 per contract. A 14.00 fall leaves 12,800 − 2,800 = 10,000, below 10,400. Call = 12,800 − 10,000 = 2,800.
- 4×50×14= loss 2800
- +|-+12800= balance 10000, below 10400
- 12800−10000= call 2800
+|- change sign
- 4ENTER50×14× loss 2800
- CHS12800+ balance 10000, below 10400
- 12800ENTER10000− call 2800
ENTER enter (on the HP, puts the number on the stack) · CHS change sign
Quick example
Buy 1 contract of 100 units at 52.00; the final settlement price is 55.50. (55.50 − 52.00) × 100 = +350 in total, however the daily amounts moved.
- 55.5−52=×100= 350
- 55.5ENTER52−100× 350
ENTER enter (on the HP, puts the number on the stack)
All Derivatives formulas, every lesson
Practice exam-style questions on Forwards, Futures, Swaps, Options and Credit Derivatives
Questions about this lesson?
Where this comes back
- Interest rate swaps: fixed vs floating Forwards, Futures, Swaps, Options and Credit Derivatives
- Pricing and Valuing Futures Contracts Derivatives
Questions candidates ask
How do you calculate a futures margin call?
Work out the day's loss (price change × units × contracts), subtract it from the margin balance and compare the result with the maintenance margin. If it is lower, the call is the initial margin minus that balance. Above maintenance, there is no call.
What is the difference between initial and maintenance margin?
Initial margin is the deposit required to open a futures position. Maintenance margin is a lower minimum balance that must be held until settlement. Falling below maintenance triggers a margin call for enough to restore the account to initial margin.
What does mark to market mean for futures?
Each day the clearinghouse sets a settlement price and credits or debits every margin account with that day's gain or loss. It is also called daily settlement, and it is why futures losses cannot accumulate unnoticed.
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