Futures contracts are traded on an organize exchange, and the contract terms are standardized by that exchange
The vast majority of futures contracts do not lead to delivery because most traders choose to close out their positions prior to the delivery period specified in the contract.
Closing out a position means entering into the opposite trade to the original one
For most contracts, daily price movement limits are specified by the exchange. Normally, trading ceases for the day once the contract is limit up or limit down
If in a day the price moves down from the previous day's close by an amount equal to the daily price limit, the contract is said to be limit down
If it moves up by the limit, it is said to be limit up
A limit move is a move in either direction equal to the daily price limit
As the delivery period for a futures contract is approaching, the futures prices converges to the spot price of the underlying asset. When the delivery period is reached, the futures price equals - or is very close to - the spot price
This is because of arbitrage opportunity: Sell a futures contract, Buy the asset, Make delivery
The amount that must be deposited at the time the contract is entered into is known as the initial margin
To ensure that the balance in the margin account never becomes negative, a maintenance margin, which is somewhat lower than the initial margin, is set. It is usually about 75% of the initial margin
If the balance in the margin account falls below the maintenance margin, the investor receives a margin call and is expected to top up the margin account to the initial margin level the nest day
The extra funds deposited are known as variation margin
In an attempt to reduce credit risk, the over-the-counter market is now imitating the margining system adopted by exchanges with a procedure known as collateralization
Open Interest is the total number of contracts that is outstanding
