Chapter 2 Mechanics of Futures Markets

In Chapter 1 we explained that both futures and forward contracts are agreements to buy or sell an asset at a future time for a certain price. A futures contract is traded on an exchange, and the contract terms are standardized by that exchange. A forward contract is traded in the over-the-counter market and can be customized if necessary.

This chapter covers the details of how futures markets work. We examine issues such as the specification of contracts, the operation of margin accounts, the organization of exchanges, the regulation of markets, the way in which quotes are made, and the treatment of futures transactions for accounting and tax purposes. We explain how some of the ideas pioneered by futures ...

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