Explain the workings of a future contract?

Explain the workings of a future contract? 

Ans. If A and B agree to buy and sell shares of a company through the exchange, traded on the exchange or corporate or clearing house provides the unconditional guarantee for its settlement. It is called future contract. Under a future contact, two parties negotiate through their respective brokers and legally there are two contracts, each between one of the parties and clearing house. Hence there is no market risk because the clearing house is in opposite positions with the two parties involved in the contract. The broker collects a deposit from the parties' concerned called initial margin. The amount of initial margin is calculated as per the formula set by the exchange. For a single futures contract, it will be small fraction of future’s underlier. Trade of futures happens via exchanges. The settlement of futures take place as per prescribed rule so future exchanges. Clearing house are owned and operated by the exchanges themselves. All dealings are centralized and open outcry method is adopted.