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<span style=”color: #222222; font-family: sans-serif; font-size: 14px;”>The members of the exchange hold positions in these contracts with the exchange, who acts as central </span>counterparty<span style=”color: #222222; font-family: sans-serif; font-size: 14px;”>. When one party goes </span>long<span style=”color: #222222; font-family: sans-serif; font-size: 14px;”> (buys a futures contract), another goes </span>short<span style=”color: #222222; font-family: sans-serif; font-size: 14px;”> (sells). When a new contract is introduced, the total position in the contract is zero. Therefore, the sum of all the long positions must be equal to the sum of all the short positions. In other words, risk is transferred from one party to another.</span>Settlement guarantee mechanism is what the exchange adopts to protect the investor.
Derivative instruments are those that derive their value from other forms of assets . These can be exchange traded or Over the counter derivatives. In the exchange traded derivative the members of the exchange hold positions and the exchange stands as the counter party . Over the counter derivatives are trade agreements between investment bankers , hedge funds , govt. enterprises and commercial banks . To rule out risk incurred by transacting with customers , the dealers approach the exchange .<span style=”color: #222222; font-family: sans-serif;”><span style=”font-size: 14px;”> The exchange at all times acts as the regulator .</span></span>
The exchange
Exchange monitors the role of both the counter party. They take a caution deposit from both the parties and settles each account on each day such that buyer and seller dont turn off on the settlement date. They minimise the risk of fraud and ensure the contract takes place on the settlement date.
Exchange will collect and settle the margin deviation based on contract price on daily basis(MTM) from buyer and sellers
It’ll have to settle the differential amount between the buyer & seller of futures on a daily basis based on the EoD share price for the day
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