In a cash market, the exchange of goods and money between the seller and the buyer takes place in the present, as opposed to the futures market where such an exchange takes place on a specified future date. This type of market is also known as the spot market, since transactions are settled on the spot.
Exchange plays the role of mediator in derivative instruments. In Futures the exchange collects the margin from both the buyer and seller, does the mark to market and on the expiry date makes the settlement for the deal happen. In options exchange settles the premium deal between the buyer and seller, does the mark to market on a daily basis and takes care of the final settlement.
Seller gets the Premium amount for signing the call/put option contract, where the premium is traded between buyer and seller.
Futures and options have a unique feature that make them a more attractive instrument from a trading perspective than stocks and bonds, that is high leverage.
The world of Derivative
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