How Does the Daily Settlement Process Differ between Futures and Forwards?
The daily settlement process, known as marking-to-market, is a key feature of futures contracts and is absent in forwards. With futures, the clearing house adjusts the value of each contract to the current market price at the end of every trading day, and funds are transferred between the accounts of the buyer and seller.
This prevents large losses from accumulating. Forward contracts are typically settled only once at maturity.
The entire gain or loss is realized on the settlement date, which increases the total credit exposure between the two parties over the life of the contract.
Glossar
Daily Settlement
Reconciliation ⎊ This procedure mandates the periodic recalculation of profit and loss across open derivative positions, typically occurring at the close of the trading day.
Forwards
Mechanism ⎊ Forwards, within cryptocurrency and financial derivatives, represent contractual agreements obligating parties to transact an asset at a predetermined price on a future date, differing from futures through customization and typically trading over-the-counter.
Daily Settlement Process
Process ⎊ The daily settlement process, within cryptocurrency, options, and derivatives, represents the culmination of trading activity, reconciling positions and transferring ownership of assets or contractual rights.