Futures For You by Carley Garner
How can a futures exchange afford to guarantee every trade that is executed?
Futures exchanges guarantee each transaction that they clear, but unfortunately, the guarantee isnít that you will make money. Instead, it assures that if you do speculate, you will be compensated in the amount deserved based on entry and exit price. This seems to be a given, but it isnít. Those speculating in forex, as opposed to futures, arenít necessarily afforded the same luxury.
Forex traders are subject to counterparty risk. Assuming a profitable trade based on entry and exit price, forex traders rely on the party on the other side of their transaction to pay up. However, although it is a real risk, the incidence of default is rare. Just because it hasnít been a common issue in the past doesnít mean that it canít or wonít in the future.
Futures exchanges stipulate and enforce margin requirements for each commodity market. Margin is a risk-based good faith deposit levied on traders with risk exposure. Simply, it is the amount of money that traders must have on deposit to buy or sell a particular futures contract or execute a short option.