"When hedging a position, futures contracts are better if the hedge produces a positive cash flow, via marking-to-market, when interest rates rise and is hurt when interest rates fall. In this case, when interest rates rise and cause equity values to fall, a short futures position will receive a positive cash flow that can be reinvested at the higher rate. If interest rates fall, and the short futures position must be marked to market with a negative cash flow, the opportunity cost of the negative cash flow is lower. Forward contracts that do not require marking-to-market do not “benefit” from changes in interest rates. "
Probably the main point is that forwards are not marked to market, while futures are marked to market. Therefore if there are positive cashflows, having a future will allow you to have access to any positive cashflow through the marked to market process. You can then reinvest.
Wit futures, you have to put up margin in the account before trading any futures. For every futures instrument, you have to put up a certain amount for margin. If the futures price goes in your favor, the “profit” is added to your account, on which you earn daily interest on. So, if interest rates are rising, you earn more because the interest rate itself is higher, but also because the asset (the futures) is rising in price and adding money to your account. Of course if you are short a futures which is negatively corelated with interest rates, then you make money when the futures goes down, and teh money that goes to your account earns the higher interest. So, if interest rates are positively correlated with the asset’s price, you’re in good shape and you want to use futures. Forwards don’t have that feature….you have to wait till contract expiration to make any gain/loss.
It depends on the correlation between futures prices and interest rates.
Lets hold everything constant except that on guy has a futures and one guy has a forward. The underlying price subsequently increases.
Based on the no arbitrage pricing, both the forward and futures contract should go up by the same amount. The futures contract will receive cash today due to mark-to-market while he gain on the forward is accured. The guy with the futures can reinvest the cash at the new higher interest rates (recall positive correlation between interest rates and futures prices.
If the price goes down, the futures contract will force the holder to make a mark-to-market payment. However he can borrow at a lower rate to finance this loss (lower opportunity cost of negative cash flow). The loss on the forward is accrued.
As the guy above me said, a long futures can benefit from changes in interest rates. The same logic applies for short futures, and negative correlation between futures prices and interest rates (in which case forwards will be more valuable).
Going_for_CFA has summed up pretty nicely…since MTM causes futures to revert back to no arbitrage level at the end of the day the return to the futures holder can only me during the day value changes & the return he can earn reinvesting those changes(which is possible only if interest rates & futures price have a +ve correlation)