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I always get confused about the cashflows occurring when a futures position is closed out. For example, say it is January and I enter into a long December Futures position with a futures price F(jan). I want to close out my position in July, and the December futures price is F(july), so I short this futures contract.

So, as I understand it, in December, the long futures has a payoff of S(Dec) - F(jan), and the short position has a payoff of F(july) - S(Dec), where S(Dec) denotes the value of the underlying asset in december.

So the total payoff in F(july) - F(jan), and this payoff happens in december, not when i close my position out in july. However, it seems that in Hull, this payoff is immediate, is there something I'm missing?

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Futures contracts are marked to market every day. This mean that each evening cash is added to or subtracted from your account as a result of the price movement that day. When you close out your position in July these daily cash movements cease, and you are left with F(july) - F(jan) which has gradually accumulated in your account. Nothing at all happens from July to December, since you are out of the future during that time.

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    $\begingroup$ Also take note of "First Notice Date" for physically-delivered contracts. Some first notice dates occur weeks before the final trading date for futures. $\endgroup$ – Norgate Data Oct 2 '15 at 3:02

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