to a futures contract and guarantees their performance. Both parties to a forward contract are subject to counterparty risk. Counterparty risk is the risk that the other party to the contract will fail to perform. Third, a futures contract is marked-to-market (discussed shortly) while a forward con- tract may or may not be marked-to-market. Last, although both a futures and forward contract set forth terms of delivery, futures con- tracts are not intended to be settled by delivery. In fact, generally less than 2% of outstanding contracts are settled by delivery. Forward con- tracts, on the other hand, are intended for delivery.     Role of the Clearinghouse Associated with every futures exchange is a clearinghouse, which per- forms several functions. One of these functions is guaranteeing that the two parties to the transaction will perform. When a market participant takes a position in the futures market, the clearinghouse takes the oppo- site position and agrees to satisfy the terms set forth in the contract. Because of the clearinghouse, the user need not worry about the finan- cial strength and integrity of the counterparty to the contract. After the initial execution of an order, the relationship between the two parties ends. The clearinghouse interposes itself as the buyer for every sale and the seller for every purchase. Thus, users are free to liquidate their posi- tions without involving the other party in the original contract and without concern that the other party may default. This is the reason why we define a futures contract as an agreement between a party and a clearinghouse associated with an exchange. In addition to its guarantee function, the clearinghouse makes it simple for parties to a futures con- tract to unwind their positions prior to the settlement date.   Margin Requirements When a position is established in a futures contract, each party must deposit a minimum dollar amount per contract as specified by the exchange in the terms of the contract. This amount, which is called the initial margin, is required as deposit by the exchange.1 The initial margin may be in the form of an interest-bearing security such as a Treasury bill. In some futures exchanges around the world, other forms of margin are accepted such as common stock, corporate bonds or even letters of credit. As the price of the futures contract fluctuates, the value of the users equity in the position changes. At the end of each trad- ing day, the exchange determines the settlement price of the futures con- tract which is an average of the prices of the last few trades of the day. This price is used to mark-to-market the users position, so that any gain or loss from the position is reflected in the investors margin account. Maintenance margin is the minimum level (specified by the