Futures Equivalent

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DEFINITION of 'Futures Equivalent'

The number of futures contracts needed to be associated with a speculative option position. The futures equivalent can be calculated by taking the number of options and multiplying it by the previous day's risk factor (delta) for the same option series.

BREAKING DOWN 'Futures Equivalent'

This term is generally used to refer to the equivalent position in futures contracts that is needed to have a risk profile identical to the option. This Delta is used in delta-based margining and risk analysis systems. Delta based margining is an option margining system used by certain exchanges. This system is equivalent to changes in option premiums or to changes in future contract prices. Future contract prices are then used to determine risk factors on which to base margin requirements. A margin requirement is the amount of collateral or funds deposited by customers with their brokers.

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RELATED FAQS
  1. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  2. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  3. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  4. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
  5. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
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