The typical sequence of cash flows in a futures contract is:
A) purchase price plus a margin account up-front, differences are settled at expiration.
B) margin account up-front, differences are posted daily and settled in cash if margin drops too low.
C) margin account up-front, all differences settled at expiration.
D) all funds are paid at expiration of the contract.

Question

Quizplus · Accepted Answer

In a futures contract, the buyer and seller must deposit a margin account up-front, which is a small percentage of the value of the underlying asset being traded. Daily, the differences in the contract's value are posted, and if the margin account drops too low, the parties must add additional funds. At expiration, all remaining differences are settled in cash. Therefore, option B is the correct answer.

The Typical Sequence of Cash Flows in a Futures Contract