LM3: futures contracts

future contract

is standardized, exchange traded variation of a forward contract

deposit initial margin and maintain maintenance margin

both counterparties in a futures contract must deposit an initial margin into a margin account at contract initiation and maintain a maintenance margin over the life of the contract

margin call

a counterparty receives a margin call if its margin balance falls below the maintenance margin and must immediately deposit funds to return the account balance to the initial margin

marked to settlement price

at the end of each trading day, a futures contract is marked to the settlement price, which is an average of the final futures prices of the day

daily settlement and margin requirement

give rise to different cash low patterns between futures and forwards, resulting in a pricing difference between the two contract types

forward and futures prices are identical

if interest rates are constant or if futures prices and interest are uncorrelated

future prices are positively correlated with interest rates

future price > forward price

future prices are negatively correlated with interest rates

future oruce

interest rate increase

• long FRA

• short futures

interest rate decrease

• short FRA

• long future

future contract BPV

is the change in futures contract value given a 0.01% ch

linear price-yield relationships

interest rate futures

convex price-yield relationship

• FRAs

• this convexity bias increases with both the size of interest rate changes and the final maturity of the underlying contract