Actuarial Outpost > MFE Futures Mark-to-Market Example?
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#1
01-08-2018, 05:02 PM
 Gilgamesh Member SOA Join Date: Jul 2014 College: University of Houston Posts: 70
Futures Mark-to-Market Example?

I have included a photo URL to an example I constructed of 1 futures contract and the marking-to-market process. I have a few questions about this process, and I would like to begin by asking you if I constructed the margin cash flows correctly, assuming the price changes given in the price column. This assumes that margin funds earn the risk-free rate, "r" (annual cont. compounded rate).

In the example, the contract price begins at \$2M (\$2 Million). Then at t = 1/4 it decreases by an arbitrary amount "a". It retains this price level at t = 1/2, then increases by "a" back to \$2M at t = 3/4, and closes out at that price.

The point of this example was to show my thought that given other things equal, the same cash flow "a" becomes more valuable if it is obtained earlier, rather than later, in the contract. This means if the spot price falls below the delivery price early in the contract, then rises above it later on, this is more favorable to the seller, because the margin cash flow they receive early in the contract earns more interest than the cash flow they paid later on, when the spot price rose above the delivery price.

The opposite could be said of the buyer. The buyer benefits if positive cash flows occur earlier, i.e. the spot price exceeds delivery price, rather than later, because the positive cash flows earn more interest over more time than the negative cash flows.

Is this reasoning correct? Also in general did I do the marking-to-market correctly?

URL: https://www.flickr.com/photos/893490...posted-public/

Last edited by Gilgamesh; 01-09-2018 at 01:02 AM.. Reason: minor typo
#2
01-08-2018, 05:03 PM
 Gilgamesh Member SOA Join Date: Jul 2014 College: University of Houston Posts: 70

Also it is reasonable to assume that the margin balance is earning risk-free interest? In a textbook example it does this, but it did not do so in a Khan Academy video. Just wanted to make sure.
#3
01-08-2018, 11:25 PM
 Academic Actuary Member Join Date: Sep 2009 Posts: 7,642

You reference the buyer (long position) twice. The initial one should be seller (short) position).

 Tags future, futures, mark, market, mfe