Sign up  |  Log in

Why is marking to market on Future contract not discounted back like Forward contract?

When we mark to market for Forward contract, we would calculate as:

=> (Ft - F0) / (1+Rf)T-t 

When marking to market for Future contract, we calculate as:

=> Current future price - Previous settlement price

Therefore, why is marking to market for Future contract not discounted back as Forward contract? What is the difference?

With exam day right around the corner, Schweser's Final Review products are designed to help you finish out your study plan and walk into the testing center feeling prepared and confident.

This is a tricky one…. my answer is, who cares.. you’re going way to deep! You know how to calculate the value of a forward and the value of a futures PV and its more than enough to crack derivaties in L3.

Here’s some prior discussion on the topic:

https://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91331059

https://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91322366

My hunch is that the futures price is a PV price which you can execute on the exchange immediately. So if you have 5 contracts at X value, and you can sell back 5 contracts at X value, thats that. 

125mph wrote:

This is a tricky one…. my answer is, who cares.. you’re going way to deep! You know how to calculate the value of a forward and the value of a futures PV and its more than enough to crack derivaties in L3.

Here’s some prior discussion on the topic:

https://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91331059

https://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91322366

My hunch is that the futures price is a PV price which you can execute on the exchange immediately. So if you have 5 contracts at X value, and you can sell back 5 contracts at X value, thats that. 

Yeah, you’re def right! It just got me thinking about it.