Next lesson: so the "futures" aren't really futures

So now you’ve got a taste of what futures contracts are like...shorter-term projections and an expiration process. New questions like "to close out the position before expiration or let it expire?" now ring through your head. As the simExchange evolves its futures market, you learn what exactly are these derivative contracts.

The next lesson in your adventure to learn more about futures is that the "futures contracts" on the simExchange are not really how futures in the real world work at all. As you may have noticed, when going long on a future, DKP is deducted from your cash pile, and when shorting a future, DKP is added to your cash pile. This isn’t really how futures trading works. Most people will never trade a futures contract in their lifetime, but with today’s online trading, the barriers to accessing more sophisticated products are decreasing for the average investor and it is good to learn how it really works.

As mentioned in So what exactly are these "futures?", a futures contract is an agreement between two parties to trade something at a set price at a set date. If you are the buyer, you are obligated to buy at the set price on the set date. However, you do not pay until you actually buy the thing on the set date. No cash changes hands when you enter a futures contract. Instead, you must post margin (make a security deposit) with your broker to cover potential losses. The amount that you have to deposit varies with the risk of the contract you entered. When your losses on the contract exceed the amount of deposits you have left with your broker, the broker will call you every day in what is called a “daily margin call” and ask you to deposit enough cash to cover the loss.

What difference does this make? In the simExchange you have to pay cash for the future. In the real world you merely make a deposit--the money is still yours so you still earn interest. Since you don’t currently earn interest in the simExchange game, this would not appear to be a big deal. However, in the real futures market, you only have to deposit a small percentage of the contract value as margin, not the 100% cost on the simExchange. This would allow you to achieve great leverage, playing $10,000 of contracts with just $1,000.

The difference is more substantial on the seller’s side. On the simExchange, the shorter actually gets DKP when shorting the futures contract. In the real futures market, the shorter enters the contract and posts margin in the same way the buyer does.

In fact, other than expiring, the simExchange futures do not actually function as futures. Part of this is to aid the learning process of helping players think about futures after just learning about stocks. The other part is that we have not yet decided how the sophisticated margin rules of trading futures should be translated in a way appropriate for the simExchange community. For now, you can think of futures contracts on the simExchange as "hybrid futures."