Question

Is there any cash payment upfront in a futures or forward contract? Explain why.

Answer 1

Is there any cash payment upfront in a futures or forward contract? Explain why.

Yes, there will be a cash payment upfront in a futures and forward contract. This is called initial margin.

In a futures or a forward contract, both the buyer and seller has an obligation to meet their respective responsibilities of buying the underlying asset and selling underlying asset.

To make good for any loss occuring due to flucuation in the price of the futures contract, the initial margin is required.

If the underlying price goes down, then the buyer who has agreed to buy at a higher price would incur loss. The amount equal to the loss amount is taken from the buyers account and transferred to the sellers account.