I understand that collateral yield is interest earned on futures positions on the assumption that the position is 100% margined - so it is the risk free on this.
What I don’t understand is who pays it? The futures seller? The exchange?
The exchange is not getting the benefit of your assumed (but not posted) 100% margin, so I guess not the exchange.
So does the seller pay it (i.e. incurs a negative collateral yield), and what’s the rationale? That the futures buyer is equivalently lending and the seller equivalently borrowing?
you are putting up margin with the exchange, they get to use your cash and you sacrifice the rfr on it. so they compensate you with the rfr. im not sure what you mean by “assumed but not posted margin”
To every buyer , the exchange is the seller
To every seller , the exchange is the buyer.
The buyer never does any deal with the seller and the seller never deals with the buyer.
The two don’t know each other , the two don’t know about each other .
The exchange never posts margin , but requires it from every buyer and every seller.
Thanks, but I think I’ve figured it out, and it isn’t quite either of the above explanations.
I know the exchange doesn’t post margin, and that it requires it from buyer and seller who never meet.
However, the CFAI text refers to the collateral yield as being something you get on an assumed 100% collateral posted basis. Now since no-one posts 100% collateral, I didn’t see how the long was getting paid (since the exchange has only the use of a fraction of this, being the margin).
I believe the answer is in the alternative name for “collateral yield”, which is “implied yield” - this indicates that the yield on the money the investor has managed not to put down (by instead taking a futures position) is somewhere earning the risk-free, at least notionally (he may have spent it all on hookers, but in that case he had the use of it, at least). So it’s a kind of notional opportunity saving, rather than hard cash received (which explains it, because who would pay the long, without having the benefit of it).
The small part of the position that is actually posted as margin will no doubt receive a real cash return (at the risk free) from the exchange, which has the use of it. But the rest is theoretical/notional - hence “implied”.
lmb … thank you for the question and the self-realized answer … this cleared it out for me as well