could someone tell me how does the “mark-to-market” operate for future? and why the future price and forward price differ? (positive correlation between underlying asset value and interest rate would mean future price higher than forward price?) sorry for asking sth this basic but i really have a hard time figuring this out. Many thanks!
Simply put, the futures exchanges require that margin be posted daily so that the value of the positions is always equal to 0 after the mark. Assume the view of the long position If the asset value of the underlying is correlated with interest rates, as the value of the underlying decreases and you owe more money, thanks to the lower interest rates, you can borrow the necessary money to post margin at a lower rate. When the price of the underlying increases, you can use the money received from the short and invest it at a higher rate. If there were negative correlation (think a bond), you’d not like the MTM feature of a future. As the interest rates rise, the value of the bond goes down. You need to borrow money at the higher rate to cover the decline in your position’s value.
thanks much, mcf. I got the how future and forward prices b/c of the m-t-m feature. Just wanna make sure I grasp the concept right, could sbd advise if the following is correct: say we long the steel futures, current px: $100, r= 5% future px a year later = $105 at T=0 a day later, say the steel px goes down to 99, so mark-to-market on a daily basis means that the long position incur a loss of 105 - 103.95 ($99*1.05) = $1.05 at the day end? the book said the future price will become the spot price at the delivery date, was that b/c the futures are settled daily and the new future price then would equal the spot price?