The Curve

by s7ven

The Contract · Futures

Contract mechanics

What a contract specifies, what holding it requires, and how it is finally discharged.

6 terms

Notional value against margin A long bar representing the full notional value a contract controls, next to a much shorter bar representing the margin required to hold it. The difference between the two is labelled leverage. WHAT THE CONTRACT CONTROLS — NOTIONAL VALUE WHAT YOU POST TO HOLD IT — INITIAL MARGIN THE GAP IS THE LEVERAGE Figures are illustrative. Every contract differs, and exchanges change margin without notice.
Position size counted in contracts hides this relationship completely. Counted in notional, it is obvious. Margin is a performance bond sized to cover a plausible day’s move, not a deposit against the full value of what you are holding, which is why it rises when volatility does.
Contract specification

The exchange-published definition of a contract: what is delivered, how much of it, in which months, with what minimum price increment and settlement method.

Specifications change. Always confirm against the exchange's own contract page rather than a third-party summary, this site included.

Tick size and tick value

The minimum price increment a contract can move in, and the currency amount that increment is worth per contract.

These two numbers are what convert a chart into money, and they differ for every instrument. Assuming a tick value from a similar-looking contract is one of the more expensive beginner mistakes.

Notional value

The full market value of what a contract controls, as opposed to the margin required to hold it.

The gap between the two is leverage. Position size expressed in contracts conceals it; position size expressed in notional does not.

Margininitial and maintenance margin

The deposit required to open a futures position, and the lower balance below which the account must be topped up.

Futures margin is a performance bond, not a loan or a down payment. Exchanges raise it when volatility rises, which can force position reductions at the least convenient moment.

Mark to marketdaily settlement

The daily process by which open positions are revalued at the settlement price and gains or losses moved between accounts in cash.

This is the mechanism that makes the clearing house's guarantee workable. It also means a futures loss is realised daily whether or not the position is closed.

Settlementphysical and cash settlement

How a contract is discharged at expiry: by delivering the underlying, or by exchanging the cash difference against a final reference price.

Holding a physically settled contract past its last trading day creates a delivery obligation. This is not theoretical, and brokers generally liquidate such positions beforehand.