Unit 3 · Level 3 · Futures & perps
Futures: the obligation
Futures were born in the 1800s grain trade: a farmer and a miller lock in today a price for wheat delivered months from now. Both sleep better. But note the word missing from that deal: 'optional'. An option gives you a RIGHT you can walk away from; a future is a binding OBLIGATION for both sides, whatever the price does in between.
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What you get asked
The core difference between an option and a future:
An option buyer's worst case is the premium; a futures trader's losses have no such built-in floor. That one word, obligation, changes everything about risk.
The margin you post to open a futures position is…
Margin is collateral, not cost. Because it's a fraction of the exposure, futures are leveraged by construction. Losses can exceed the deposit.
Put the life of a futures position in order
Mark-to-market means there's no hiding: every day's loss is real money leaving your account that same evening.
Futures P&L settles ___, so losses hit your account long before the contract ever expires.
Daily settlement is the heartbeat of futures markets. It's also why an underfunded account can be liquidated mid-trend, even one that would eventually have been right.
Why do exchanges insist on daily mark-to-market at all?
Settling up every day keeps one trader's blow-up from becoming everyone's problem. It's the same clearing logic that let futures markets survive 1987 while bilateral promises failed. 🐜
The rest of this unit
Obligations, basis, funding and hedges: the contracts professionals run on.