How a Hedging Account Works - FuturesHound.com the Futures Portal

Brokers

HOME / Futures Products / COMMODITIES

Email this to a friend

Print HTML

How a Hedging Account Works

CME Group, CME Group

Published 10/02/2008 - 3:13 a.m. EST

Rate This Article:

ABOUT THE AUTHOR

CME Group

Website:
http://www.cmegroup.com

How Does a Performance Bond Work?

When selling or buying futures contracts, it is necessary to post a performance bond deposit with a futures broker. This is a small percentage of the value of each contract traded, representing the dollar value of the probable maximum price move in the next day’s market, and thus the likely maximum loss that could be incurred in that day’s trading.

Because no one knows whether prices will move up or down by this amount, parties on both the buy side and the sell side of all futures transactions post such a deposit. That way, the profiting side of the market can be immediately credited out of the balances of the losing side of the market. This flowof payments is conducted by CME Clearing, in transactions with all clearing members, who in turn “settle up” with each of their own customers.

Details: How a Hedging Account Works

Video: Introduction to Hedging

Legal Disclaimer and Risk Disclosure: Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leverages investment, and because only a percentage of a contractâ€™s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All orders are entirely at your risk, and it will be your responsibility to monitor these orders. There are limitations to the protection given by stop loss orders therefore we give no assurance that limit or stop loss orders will be executed, even if the limit price is met, in full or at all.