ABSTRACT
This chapter examines in more detail a number of the aspects of futures contracts. The futures exchange, clearing house or regulator must set margins, price limits, trading hours, minimum price movements, contract multipliers and contract maturities; while the trader must calculate the cash balance required to cover margin payments. There are two different views on setting margins. One view is that the purpose of margins on futures is to guarantee that the contract will be honoured. The other view is that the size of futures margins is a regulatory tool for controlling price volatility, particularly spot volatility. L. G. Telser argued that higher margins will raise the cost of trading in futures, but for different reasons. Margins use up part of the trader's precautionary balances, and this money is no longer available to deal with unexpected events. An increase in margins will reduce the risk of default, so reducing the size of the premium and narrowing the no-arbitrage band.
