What effects does "marking to market" have on futures contracts?
What will be an ideal response?
The process of marking to market implies that futures contracts have daily cash flows associated with them. One can be either long (having bought the contract) or short (having sold the contract) in the futures market at a particular price. Since both sides are treated symmetrically, let's assume you are long. You must post funds in a margin account, and if on subsequent days, the futures price moves in your favor, that is, the foreign currency futures prices rises as the foreign currency strengthens; funds are placed into your margin account and are taken out of the margin accounts of those who sold the foreign currency futures contract. This process continues every day until the maturity date of the contract.
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