The Futures Contract: Rapid Fire

What this video covers

• Why a futures contract is factory-made and standardized whereas a forward is a customized private handshake, and why counterparty risk lives only in the forward
• How futures trade on a regulated exchange but forwards are over-the-counter (OTC) agreements negotiated privately away from any exchange
• Why the clearinghouse guarantees futures performance through novation, and why the exchange itself, a broker, or "no counterparty risk" paired with a forward is always wrong
• How a trader exits a futures position by offsetting: an equal and opposite trade in the exact same delivery month, and why a different month creates a spread instead of a close
• What marking to market means: daily collection from losers and payment to winners through the margin system, versus a forward's full gain or loss building until delivery
• The difference between clearing members (direct accounts with the clearinghouse, meeting capital and margin standards) and non-clearing members (must route through a clearing member)
• What basis grade (also called par grade or contract grade) means for delivery, and why a higher grade earns a premium above the contract price while a lower grade settles at a discount below it