Lesson 2 of 5 · 14 min

Mark-to-market: futures versus forwards

A forward's gain or loss builds up unsettled until maturity, while a futures contract settles it in cash every day and resets its value to zero; by maturity the cumulative realized results are about the same.

In short

  • A forward's price F0(T)F_0(T) never changes. Its MTM value is Vt(T)=St−F0(T)(1+r)−(T−t)V_t(T) = S_t - F_0(T)(1+r)^{-(T-t)} for the long, but nothing is paid until maturity.
  • A futures price ft(T)f_t(T) changes every day. Each day's gain or loss, ft(T)−ft−1(T)f_t(T) - f_{t-1}(T) per unit for the long, is paid through the margin account.
  • After daily settlement the futures contract's value resets to zero at the new settlement price.
  • If the margin balance falls below the maintenance margin, a margin call requires topping up to the initial margin.
  • Daily settlement cuts counterparty credit risk. The cumulative realized MTM on a futures contract is approximately that of a comparable forward.

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Mark-to-market: futures versus forwards · Pricing and Valuation of Futures Contracts