Let’s make it clear, what’s the difference between Spot and Futures trading. This will help us to give you some essential concepts to understand futures contract further.
On spot markets the prices are ‘settled’ instantly. Futures markets are different. In a futures market, two counterparties make a trade on a contract, with settlement on a future date (when the position is liquidated).
It is important to understand: the way the futures markets calculate unrealized profit and loss does not allow traders to buy and sell the commodity itself; therefore, traders buy a contract representing a commodity, with settlement in some future.
To open a new trade in a futures exchange, there will be margin checks against collateral. There are two types of margin:
- Initial Margin: To open a new position, your collateral needs to be greater than the Initial Margin.
- Maintenance Margin: If your collateral + unrealized profit and loss fall below your maintenance margin, you will be auto-liquidated. This results in penalties and additional fees. You can liquidate yourself before this point to avoid being auto-liquidated.
Due to leverage, it is possible to hedge out spot or holding risk with relatively small capital outlays in the futures market. For example, if you are holding 1000 USDT worth of BTC, you can deposit a much smaller (50 USDT) collateral into the futures market, and short 1000 USDT of BTC to fully hedge out the positional risk.
Note that futures prices are different from spot market prices, because of carrying costs and carrying return. Like many futures markets, Scalpex uses a system to encourage the futures market to converge to the ‘mark price’ via funding rates. While this will encourage long-term convergence of prices between spot and futures for the BTC/USDT contract, in the short term there may be periods of relatively large price differences.
The first futures market, Chicago Mercantile Exchange Group (CME Group), provides a traditional futures contract. But modern exchanges are moving toward the perpetual contract model.
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