Question: Is my understanding of how futures contract works correct?
Just trying to understand the basics of futures contract and its daily installments.
Consider a discrete time model where $t=0,1,2,...$. The agreed-on price is futures price and denote this as $F_t$. Denote the underlying asset's price over time as $P_t$.
The way daily installments works is:
At the end of the trading day, it is marked-to-market, so we evaluate $F_t-P_t$.
If $F_t-P_t>0,$ this amount is deposited to my margin account.
If $F_t-P_t<0,$ this amount is subtracted from my margin account.
If I face a streak of losses, then there would be a marginal call unless I replenish my margin account enough to cover further losses.
Is this correct?
What I am mainly confused is that the contract price, the price both parties of futures contract agree, is fixed, right? But the futures contract price changes over time? I don't understand what is "mark-to-market" on a daily basis. Is it the agreed price or the futures price?