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Jun
17
awarded  Critic
May
14
comment Why does Futures contract credit and debit a position daily, if it has “locked” the price?
@bonCodigo. I'm not sure the following point is clear to you but just in case I'll add it: The daily mark-to-market only settles the difference between the daily market price and your futures price. You don't pay the entire notional value of the contract. So it would just be a fraction of the locked price as you put it. This is what Matt Wolf alludes to that daily settlement is not the same as a final settlement. Again if this was already clear to you then just ignore my comment.
May
14
awarded  Editor
May
14
revised Why does Futures contract credit and debit a position daily, if it has “locked” the price?
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May
14
comment Why does Futures contract credit and debit a position daily, if it has “locked” the price?
Lets consider the Farmer and Baker. Yes, the prices are locked but they might not actually have the crop right now. For example, the Farmer might want to lock in the price of next years crop. However the crop might go bad, the machinery breaks down so he might not have any crop to deliver. He then needs to buy the crop in the spot market to honor his contract or buy back the contract he sold in the market. This may realize a loss for him which he may or may not be able to take. So we can either trust that he can do it, or we can make sure he can do it by mark-to-market his accounts every day.
May
14
answered Why does Futures contract credit and debit a position daily, if it has “locked” the price?
May
13
comment Are Futures exactly Delta One?
Sure the transaction is done but at what price can you sell the contract back at? Obviously the new fair price (in an efficient market). Hence the contract you own has the value of the fair price at any point in time and the fair price changes according to the borrowing cost.
May
13
comment Are Futures exactly Delta One?
The forward changes dSexp(r(T-t)). Obviously since that is the change in the cost to borrow money to buy the stock.
May
13
awarded  Commentator
May
13
comment Are Futures exactly Delta One?
@Matt Wolf. Assume I borrow money to buy a non-dividend paying stock. Are you saying that the interest cost to buy a \$ 1 stock is the same as for a 2 dollar stock? If not then it should be clear that the forward price for this stock will change more than 1 dollar if the stock price goes from 1 dollar to 2 dollar. In fact, the difference in forward price is the difference between the two discounted stock prices. In other words $\Delta F = 2exp(r(T-t)) - 1exp(r(T-t)) = \Delta S exp(r(T-t))$. So we have $\Delta F/\Delta S = exp(r(T-t))$.
May
13
comment Are Futures exactly Delta One?
@Matt Wolf. You don't agree that the forward price is the discounted spot price?
May
13
comment Are Futures exactly Delta One?
@Matt Wolf. Since you agree that the forward price is the discounted spot price it should be clear that the delta cannot be 1. The financing cost to buy the spot changes with the discounted spot price. The delta is therefore the discount factor.
May
13
comment Are Futures exactly Delta One?
I don't know what you mean with "the price becomes constant". Obviously the price of the futures contract that you own is the current fair price of the futures contract (in an efficient market).
May
13
comment Are Futures exactly Delta One?
So what is the price of the futures at expiry in your formula?
May
13
answered Are Futures exactly Delta One?
May
13
comment Are Futures exactly Delta One?
The delta for a forward is not 1. It's exp(r(T-t)) like a futures.
May
13
comment Are Futures exactly Delta One?
Your formula for for the price of a futures contracts is not correct. For example consider the price at expiry with T=0. Your formula states f_{T=0}=S-K which can't be true.
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