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I'm trying to understand exactly when cash changes hands in regards to a futures contract, ignoring exchange fees, say for the purpose of determining how much interest I could receive on the cash. Suppose the previous day's settlement price of the future was 99 dollars. If I enter into a long position in a futures contract at a price of 100 dollars, then I enter a short position within the same trading day at a price of 101 dollars, when exactly do I receive the 1 dollar profit? I see 3 possibilities in order from most to least likely:

  1. The exchange just keeps track of all the long and short positions and prices of those positions made by everyone and settles them all at the end of the day, regardless of whether a position is still open or closed before the end of the day. I cannot earn interest on my 1 dollar profit intra-day.

  2. No money exchanges hands when I enter the long position, the exchange keeps track of open positions and I get the 1 dollar when I enter the short position and close my position. I can earn interest on my 1 dollar profit immediately after closing my position.

  3. Money changes hands immediately based off the difference of the market price and the previous day's settlement price, so when I enter my long position I pay 1 dollar, then when I close my long position I receive 2 dollars. I may have to pay interest on the 1 dollar I borrow when I open the position, but then I can receive interest on my profit of 1 dollar after closing my position.

I'm guessing the answer is 1. uniformly across all exchanges, but I'd be interested to know the details and if any exchanges do it any other way.

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  • $\begingroup$ There is no such thing as "earning interest intraday" AFAIK. You only earn interest for locking up you money at least overnite. This is a feature of money markets and banks, not specifically futures related. $\endgroup$
    – nbbo2
    Commented Sep 14, 2021 at 18:17
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    $\begingroup$ @noob2 Hmm I see your point. However, in the equivalent setup if I was trading spot and had the 1 dollar of profit immediately available when I sell, I could earn intra-day interest by trading a box spread on the underlying to lend the 1 dollar at the implied interest rate. In any case, would you say that my guess (1.) is a fair characterization of what happens, or am I missing the details? $\endgroup$
    – nullUser
    Commented Sep 14, 2021 at 19:56
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    $\begingroup$ This question is really quite technical. When you sell the future, the exchange owes 1 dollar to your broker. which will be paid at settlement later that night. However I believe your broker gives you credit for that 1 dollar immediately so you can start another futures or options on futures trade right away supported by that dollar. But I would check with your broker to make sure this is how they handle it. $\endgroup$
    – nbbo2
    Commented Sep 15, 2021 at 7:35

1 Answer 1

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The exchange credits your clearing broker with 1 USD at settlement EOD. Your clearing broker then credits your cash account with 1 USD same day EOD. Exchanges don't deal with end investors directly.

I don't know if a clearing broker credits that 1 USD intraday so that you can use it before EOD, but maybe some do. Certainly they know that they will get that 1 USD from the exchange, so it's possible.

I don't believe you can earn any interest intraday. I doubt these days that clearing brokers offer any meaningful interest on cash in your cash account, even over multiple days. If you care about that, sweep the cash back to your bank.

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