Mechanics of Futures Markets (FRM Part 1 – Book 3 – Chapter 5)

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After completing this reading, you should be able to:
- Define and describe the key features of a futures contract, including the asset, the contract price and size, delivery, and limits.
- Explain the convergence of futures and spot prices.
- Describe the rationale for margin requirements and explain how they work.
- Describe the role of a clearinghouse in futures and over-the-counter market transactions.
- Describe the role of central counterparties (CCPs) and distinguish between bilateral and centralized clearing.
- Describe the role of collateralization in the over-the-counter market and compare it to the margining system.
- Identify the differences between a normal and inverted futures market.
- Explain the different market quotes.
- Describe the mechanics of the delivery process and contrast it with cash settlement.
- Evaluate the impact of different trading order types.
- Compare and contrast forward and futures contracts.

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