male voiceover: you might be wonderingwhy the exchange would be willing to take on the counter partyrisk for people trained, exchanging these kinds ofstandardized futures contract. the first reason is thatthe exchange actually stands to make a lot of money.
aapl stock premarket, what he can do is tell these people who wanna buy apples in the future, he could say for example, "hey, youcan enter into a futures contract " with a settlement priceof 22 cents per pound."
so that's what they're going tohave to come to the table with. that is 22 cents per poundand he could tell the people who are gonna deliver the apples that when you deliver the apples, the settlement priceis 20 cents per pound. essentially, when the settlement occurs, he's going to be ableto make a 2 cent profit. let me review that again. if he only has to pay these guys20 cents a pound for the apples,
and these guys are paying 22cents a pound for the apples, maybe i should make thisarrow go in this direction because this is the flowof the actual money. if these guys are going topay 22 cents for the apples and then as the exchange, this guy only has to give20 cents to the farmers, he's going to make 2 cents profit. on futures contracts, on1,000 pounds of apples that's going to be $20 foreach of those contracts.
that's going to be $20 per contract and he's going to bedoing this night and day, trading with all of the different farmers and all of the different customers and even some speculatorswho 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'sgoing to protect himself against losses is he's going to make each of these parties setaside some money in case, the futures contractprice moves against them and this money that they haveto set aside is called margin and i'll explain this in moredetail in the future video but what it essentiallyis, is the amount of money that this guy or the largestamount that this guy thinks that the futures price might move by,
the contract price mightmove by any given day and so, he has a cushion. he can actually use themargin as kind of insurance so he can make sure thaton the settlement date, both parties will kind of be able to meet their obligations. i'll go into more detailwith that on the next video on exactly how margin works.
