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Why Traders May Choose Cash-Settled Futures over Spot

Article Quant Q&A · Author: 0x teeming
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Summary

The document considers why a trader might buy a cash-settled quarterly bitcoin future instead of holding bitcoin in the spot market. Its main explanation is leverage: a spot purchase requires paying the full asset value, while opening a futures position requires initial margin set by the exchange.

Using an illustrative comparison with the same assumed spot and futures value, the answer shows how a margin deposit below the full notional amount creates leveraged exposure. It notes that variation margin may also be required, and the position remains implicitly leveraged while initial and incremental margin together stay below the marked-to-market value. The discussion is deliberately narrow: it sets aside fair-value factors affecting futures pricing and does not weigh leverage against liquidation risk, funding or roll costs, or the utility of owning the underlying.

Key ideas

  • Futures can provide exposure with a smaller initial cash outlay than purchasing the underlying outright.
  • The exchange sets the initial margin required to open a futures position.
  • Variation margin can add to the position's cash requirements as its value changes.
  • A margin-funded position is leveraged while total margin remains below its marked-to-market value.

Tags

FuturesCryptoPosition sizingRisk management
Full text
# What advantage does cash-settled futures have over spot?


# What advantage does cash-settled futures have over spot?












For example with bitcoin there is both the spot market and a cash-settled quarterly futures market.

As a buyer when would I want to buy quarterly futures instead of just buying on the spot market?

Spot offers the advantage of actually owning the underlying and holding a long position in perpetuity. With quarterly futures I get none of the utility of owning bitcoin and I also have to roll my position every 3 months. So why would someone buy futures instead of spot?

## Answer by Thomas Boyd (score 3)

https://quant.stackexchange.com/a/70298

Futures are derivative instruments that are traded for many different purposes, by many different types of accounts. Limiting the discussion to your specific example though, the primary advantage futures have over owning physical bitcoin is leverage.

If you buy one bitcoin in the physical market your cash outlay is the full price of that bitcoin, say USD 44,000. Ignoring any of the fair value parameters that would affect the no-arbitrage futures price, lets say the price of a bitcoin future is also USD 44,000. To open a position that futures contract your cash outlay is limited to the exchange mandated initial margin, let's say 10%. In the futures transaction your initial cash outlay is only USD 4,400.

As long as initial margin + any additional incremental margin (variation margin) sums to less than 100% of the position's mark to market value, the futures trade is implicitly levered.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.