Actuarial Outpost
Go Back   Actuarial Outpost > Exams - Please Limit Discussion to Exam-Related Topics > SoA/CAS Preliminary Exams > Investment / Financial Markets
FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

DW Simpson
Actuarial Jobs

Visit our site for the most up to date jobs for actuaries.

Actuarial Salary Surveys
Property & Casualty, Health, Life, Pension and Non-Tradtional Jobs.

Actuarial Meeting Schedule
Browse this year's meetings and which recruiters will attend.

Contact DW Simpson
Have a question?
Let's talk.
You'll be glad you did.

Investment / Financial Markets Old Exam MFE Forum

Thread Tools Search this Thread Display Modes
Old 01-08-2018, 06:02 PM
Gilgamesh Gilgamesh is offline
Join Date: Jul 2014
College: University of Houston
Posts: 70
Default 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?

Thanks for your help.


Last edited by Gilgamesh; 01-09-2018 at 02:02 AM.. Reason: minor typo
Reply With Quote
Old 01-08-2018, 06:03 PM
Gilgamesh Gilgamesh is offline
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.
Reply With Quote
Old 01-09-2018, 12:25 AM
Academic Actuary Academic Actuary is offline
Join Date: Sep 2009
Posts: 9,194

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

future, futures, mark, market, mfe

Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off

All times are GMT -4. The time now is 09:25 AM.

Powered by vBulletin®
Copyright ©2000 - 2020, Jelsoft Enterprises Ltd.
*PLEASE NOTE: Posts are not checked for accuracy, and do not
represent the views of the Actuarial Outpost or its sponsors.
Page generated in 0.13074 seconds with 9 queries