Male voiceover: You might be wondering
why the exchange would be willing to take on the counter party
risk for people trained, exchanging these kinds of
standardized Futures Contract. The first reason is that
the exchange actually stands to make a lot of money. What he can do is tell these people who wanna buy apples in the future, he could say for example, "Hey, you
can enter into a Futures Contract " with a settlement price
of 22 cents per pound." So that's what they're going to
have to come to the table with. That is 22 cents per pound
and he could tell the people who are gonna deliver the apples that when you deliver the apples, the settlement price
is 20 cents per pound. Essentially, when the settlement occurs, he's going to be able
to make a 2 cent profit. Let me review that again. If he only has to pay these guys
20 cents a pound for the apples, and these guys are paying 22
cents a pound for the apples, maybe I should make this
arrow go in this direction because this is the flow
of the actual money. If these guys are going to
pay 22 cents for the apples and then as the exchange, this guy only has to give
20 cents to the farmers, he's going to make 2 cents profit. On Futures Contracts, on
1,000 pounds of apples that's going to be $20 for
each of those contracts. That's going to be $20 per contract and he's going to be
doing this night and day, trading with all of the different farmers and all of the different customers and even some speculators
who might wanna do this. So maybe if the spread, if we kind of can maintain this 2 cents spread, he'll keep making $20 every time one of these Futures Contracts exchange hands. Now, the other way that he's
going to protect himself against losses is he's going to make each of these parties set
aside some money in case, the Futures Contract
price moves against them and this money that they have
to set aside is called Margin and I'll explain this in more
detail in the future video but what it essentially
is, is the amount of money that this guy or the largest
amount that this guy thinks that the Futures price might move by, the contract price might
move by any given day and so, he has a cushion. He can actually use the
margin as kind of insurance so he can make sure that
on the settlement date, both parties will kind of be able to meet their obligations. I'll go into more detail
with that on the next video on exactly how margin works.