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About E-mini S&P 500
The contract details what asset is to be bought or sold, and how, when, where and in what quantity it is to be delivered. The terms also specify the currency in which the contract will trade, minimum tick value, and the last trading day and expiry or delivery month.
Standardized commodity futures contracts may also contain provisions for adjusting the contracted price based on deviations from the "standard" commodity, for example, a contract might specify delivery of heavier USDA Number 1 oats at par value but permit delivery of Number 2 oats for a certain seller's penalty per bushel.
Before the market opens on the first day of trading a new futures contract, there is a specification but no actual contracts exist. Futures contracts are not issued like other securities, but are "created" whenever Open interest increases; that is, when one party first buys goes long a contract from another party who goes short. Contracts are also "destroyed" in the opposite manner whenever Open interest decreases because traders resell to reduce their long positions or rebuy to reduce their short positions.
Speculators on futures price fluctuations who do not intend to make or take ultimate delivery must take care to "zero their positions" prior to the contract's expiry.
After expiry, each contract will be settled , either by physical delivery typically for commodity underlyings or by a cash settlement typically for financial underlyings. The contracts ultimately are not between the original buyer and the original seller, but between the holders at expiry and the exchange.
Because a contract may pass through many hands after it is created by its initial purchase and sale, or even be liquidated, settling parties do not know with whom they have ultimately traded. Compare this with other securities, in which there is a primary market when an issuer issues the security, and a secondary market where the security is later traded independently of the issuer.
Legally, the security represents an obligation of the issuer rather than the buyer and seller; even if the issuer buys back some securities, they still exist. Only if they are legally cancelled can they disappear. The contracts traded on futures exchanges are always standardized. In principle, the parameters to define a contract are endless see for instance in futures contract. To make sure liquidity is high, there is only a limited number of standardized contracts.
Most large derivatives exchanges operate their own clearing houses, allowing them to take revenues from post-trade processing as well as trading itself. By netting off the different positions traded, a smaller amount of capital is required as security to cover the trades.
There is sometimes a division of responsibility between provision of trading facility, and that of clearing and settlement of those trades. Derivative exchanges like the CBOE and LIFFE take responsibility for providing the trading environments, settlement of the resulting trades are usually handled by clearing houses that serve as central counterparties to trades done in the respective exchanges.
Derivative contracts are leveraged positions whose value is volatile. They are usually more volatile than their underlying asset. This can lead to credit risk , in particular counterparty risk: In a safe trading environment, the parties to a trade need to be assured that the counterparties will honor the trade, no matter how the market has moved.
This requirement can lead to complex arrangements like credit assessments and the setting of trading limits for each counterparty, thus removing many of the advantages of a centralised trading facility. To prevent this, a clearing house interposes itself as a counterparty to every trade, in order to extend a guarantee that the trade will be settled as originally intended. This action is called novation. As a result, trading firms take no risk on the actual counterparty to the trade, but instead the risk falls on the clearing corporation performing a service called central counterparty clearing.
The clearing corporation is able to take on this risk by adopting an efficient margining process. A margin is collateral that the holder of a financial instrument has to deposit to cover some or all of the credit risk of their counterparty , in this case the central counterparty clearing houses. Clearing houses charge two types of margins: The Initial Margin is the sum of money or collateral to be deposited by a firm to the clearing corporation to cover possible future loss in the positions the set of positions held is also called the portfolio held by a firm.
Several popular methods are used to compute initial margins. The Mark-to-Market Margin MTM margin on the other hand is the margin collected to offset losses if any that have already been incurred on the positions held by a firm.
This is computed as the difference between the cost of the position held and the current market value of that position. If the resulting amount is a loss, the amount is collected from the firm; else, the amount may be returned to the firm the case with most clearing houses or kept in reserve depending on local practice. When you are ready to go live, simply fund an independent trading account and let your strategy trade for you.
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