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 each deposit a margin account upfront, and any differences in the contract's value are settled daily. If the margin drops too low, the trader must deposit additional funds into the account. At the contract's expiration, the remaining funds are settled in cash. Therefore, option B is the correct sequence of cash flows in a futures contract.

The Typical Sequence of Cash Flows in a Futures Contract