Chapter 2: Forward and Futures Contracts

In this section

• Forward Contracts: Structure, Payoffs, and Settlement
  Explore the essential mechanics, payoff structures, and settlement features of forward contracts while learning how they integrate with advanced portfolio management goals.
• Futures Contracts: Marking to Market and Margins
  A thorough exploration of daily settlement mechanics, margin requirements, and risk management controls within futures trading.
• Forward vs. Futures: Key Distinctions
  Compare the defining features of forward and futures contracts, exploring differences in standardization, daily margining, market liquidity, and counterparty risk.
• Margining, Collateral, and Settlement
  Explore how margining, collateral, and settlement processes ensure the integrity of futures contracts, including real-world examples and best practices
• Index and Currency Futures
  Explore the mechanics, applications, and nuances of index and currency futures, including contract specifications, hedging strategies, pricing, and best practices for portfolio managers.
• Commodity, Interest Rate, and Equity Futures
  Discover the key principles, real-world workflows, and strategic uses of commodity, interest rate, and equity futures within a dynamic market environment.
• Physical vs. Cash Settlement
  Explore the key differences between physically delivered and cash-settled futures and forwards, including practical examples, operational considerations, and exam-focused insights for CFA Level I candidates.
• Forward Rate Agreements (FRAs)
  A deep dive into FRAs, their cash-settlement structure, valuation, and role in hedging or speculating on future interest rates.
• Calendar Spreads and Interdelivery Spreads
  Explore how calendar and interdelivery spreads function in futures markets, including their structure, risk dynamics, seasonality influences, and practical applications for hedgers and speculators.
• Clearing House Variation and Initial Margin Calculations
  Explore how clearinghouses use margining systems, including SPAN, to manage risk exposures with daily variation margin and initial margin requirements in futures trading.
• Exchange for Physical (EFP) Transactions
  Learn how EFPs allow private, off-exchange swaps of futures for underlying physical assets, helping market participants efficiently manage hedging and rollovers.
• Algorithmic Execution in Futures Markets
  A comprehensive exploration of automated trading strategies, including high-frequency trading and risk controls, for optimizing execution in futures markets.
• Spread Trading in Futures Markets
  Explore spread trading in futures markets, covering intermarket, interexchange, and commodity–product spreads. Learn about margin offsets, real-world applications, and methods to manage volatility and risk effectively.
• Cross-Margining Among Different Futures Exchanges
  Explore how cross-margining agreements among futures exchanges can optimize capital efficiency, reduce margin requirements, and enhance systemic resilience in derivatives markets.
• Microstructure of the Futures Market
  An in-depth exploration of how orders are placed, matched, and executed in the futures market, featuring real-world insights into central limit order books, liquidity impacts, bid-ask spreads, and slippage.
• Tail Risk in Futures Trading
  Explore the nature of extreme market moves, gap risk, and how to manage unexpected large losses in futures trading.
• Portfolio Margining Approaches for Futures Traders
  A detailed exploration of portfolio margining for futures traders, covering risk-based margin methodologies, correlation offsets, dynamic calculations, regulatory considerations, and real-world examples.
• Basis Risk in Futures Hedging
  Learn how basis risk in futures hedging arises, why it matters, and how to manage it effectively by selecting highly correlated instruments and closely monitoring changing spot-futures price dynamics.