What is a futures contract?

Futures markets were designed to solve all the three problems (listed in Question 4) of forward markets. Futures markets are exactly like forward markets in terms of basic economics. However, contracts are standardised and trading is centralized (on a stock exchange). There is no counterparty risk (thanks to the institution of a clearing corporation which becomes counterparty to both sides of each transaction and guarantees the trade). In futures markets, unlike in forward markets, increasing the time to expiration does not increase the counter party risk. Futures markets are highly liquid as compared to the forward markets. Derivatives Trading

 

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