Explain how the clearing corporation reduces the risk it faces in the futures market through the use of margin accounts and marking-to-market.
What will be an ideal response?
The clearing corporation requires each party to a futures contract to place a deposit with the corporation. This practice is called posting margin in a margin account. The margin account serves as a guarantee that when the contract comes due the parties can meet their obligations. Minimum deposits must be maintained in these accounts or the contracts are sold. The daily process of marking to market has the corporation posting gains and losses to each party's account. Again, this guarantees that obligations are met. If an individual's margin account falls below the minimum required the contract will be sold.
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What will be an ideal response?