If you use futures to pre-invest in asset classes before you get the cash, what happens if your position moves against you and you have to pay your counterparty when the position is marked-to-market? Assuming that you have no cash, you just default?

and how do you even have the money to post margin when you enter into the position?

When the cash is eventually received, the investor will close out the futures position and invest the cash. This transaction is equivalent to paying off this implicit loan. The investor will then be long the underlying. We should remember that this position is certainly a speculative one. By taking a leveraged long position in the market, the investor is speculating that the market will perform well enough to cover the cost of borrowing. If this does not happen, the losses could be significant. But such is the nature of leveraged speculation with a specific horizon. See Text book. P374

I get that, but assuming you are investing in the future in the first place, you would have to post margin to the clearinghouse at inception…just doesnt seem very realistic. In any case, probably out of the scope of what we need to know. I’m just curious…

If you just assume this by a portfolio manager, who has an open ended fund, meets a client who promises that he will give large amount for investment in a few days. In this case, the PM can go long on futures and also be in a position to pay the margins from the existing funds. (ofcourse, this should be for a temporary short period)…

I know that futues conctracts do not require a cash outlay, but nevertheless when i pre-invest with futures, i need to deposit money anyway. but at the point in time i make the investment, i dont have cash at hand.

so how does this work, do i borrow?, so instead of investing in the long risk free bond i borrow the cash?

is the cost of borrowing not includedi in these analysis?

you are wrong about this statement: but nevertheless when i pre-invest with futures, i need to deposit money anyway.

why would you need to invest the cash at the time you signed the contract with futures?

The futures is a zero-outlay transaction. Cash is required only at the expiration of the contract … and then you have the cash available.

I’m not entirely sure about the no margin thing… I think in CFA world you don’t post margin, but in the real world you do.

I wasn’t talking about the margin. Margin is ignored in the CFAI world.

I was talking about the cost of the investment itself when I said the above. If you needed to invest in 1 Mill of Futures - that 1 Mill is due at the end … (and would be basically a Mark to Market with the futures exchange).

Is there a credit risk for futures contract?

I thought the credit risk exist in forwards, options, and swaps in OTC markets.

futures credit risk would be of the same nature of forwards, the difference is there is a clearinghouse intermediates and probably requires more frequent posting on a mark to market basis as the contracts are standardized.

they are marked to market daily

(and that is one of the ways to minimize credit risk).

Make sense.