why is it that daily settlement of long futures contracts will require cash when interest rates are increasing and produce cash when decreasing?
Thanks
I think the point here is that when interest rates are correlated to the spot price of the underlying you earn more or less on the margin account depending on the sign of the correlation.
Suppose you are long the underlying via a future contract:
If interest rates are positively correlated with the underlying you earn more interests on your margin account balance when the underlying goes up and you only loose less interests on your margin account balance when the underlying goes down.
If interest rates are negatively correlated with the underlying you earn less interests on your margin account balance when the underlying goes up and you only earn more interests on your margin account balance when the underlying goes down.
Note that the scenario with positive correlation is more favorable to you in a future contract. If you are short the underlying the situation just turns around.
This is also the reason why the values of future and forward contracts might differ due to correlation between interest rates and the underlying.
Regards, Oscar