Can someone help please explain the below, and also the opposite when the correlation between the price of the underlyuing asset and interest rates are negative? Thanks in advance.
A preference for the mark to market feature will arise from a positive correlation between interest rates and the price of the contract asset.
When the value of the underlying asset increases and the market to market generates cash, reinvestment opportunities tend to be better due to the positive correlation of asset values with higher interest rates.
When the value of the underlying asset decreases and the market to market requires cash, borrowing costs tend to be lower due to the positive correlation.
If rates are positively correlated with future prices (i.e. rates go up and prices go up), the gains on mark-to-market can be reinvested at higher rates, and losses can be funded through borrowing at lower rates, so there is a preference for futures over forwards (and therefore a higher price for futures) when rates are positively correlated to future prices.
Key point here is that futures are cash collateralized, so when there are “gains” or “losses”, cash actually moves around in-line with those mark-to-market gains and losses, and that cash can either earn a higher rate for you (when you have mark-to-market gains) or be borrowed at a lower rate (when you need to post your mark-to-market losses).