# collateral return

My question: Where is the collateral return coming from? Question details: Reading #34 For commodity futures, total return = spot return + collateral return + roll return. The explanation of “collateral return” is: 1) It is the result of no-arbitrage. 2) Collateral return = risk-free rate of return Reading #36 The price formula of commodity future is: (r-delta)T F = S e t,0 0 Or: F_t,0 = S_0 e ^ (r-delta)T where r is the risk-free rate. Anyway, the price formula of commodity future already contains the risk-free rate, which means the price of future has already adjusted for risk-free rate. Then comes my question, where is the collateral return coming from?

time.

You margin is collateral, and collateral return is interest on your margin. The RFR embedded in the futures price is just the arbitrage price setting. You still have to put down collateral.

Collateral Return comes from the fact that instead of buying at the spot rate, you could simply take that cash, invest at the risk free rate and have sufficient funds to pay for the commodity at the forward rate. ie: Time.

PJStyles Wrote: ------------------------------------------------------- > Collateral Return comes from the fact that instead > of buying at the spot rate, you could simply take > that cash, invest at the risk free rate and have > sufficient funds to pay for the commodity at the > forward rate. > > ie: Time. future, not forward, you pay for a future now, so it’s the return on your margin