futures prices

[NeedToQualify]

Hi the following issue is confusing me.

If the futures price now (time t) is F1 and it was F0 when the contract was bought, then :

1) If we close out our position, our profit is F1-F0

2) If we value the futures contract now, we get

(F1-F0)e^-(T-t)

Please help!


Thanks

 

[didster]

Interesting question. As no else has responded.

Is the profit on closing out the contract (1) really f1-f0??

Say I held the 2 opposite contracts (instead of what happens in practice where the clearing house holds the contracts not me)
a) first future would pay at T a profit of ST-F0
b) second future would pay at T a profit of F1-ST

Put together we get (F1-F0) but at time T
Surely we cannot expect to get (F1-F0) now for closing out now and letting the clearing house hold the opposing contracts instead and have to wait till T to receive (F1-F0). What happens if we waited a month and the future price was still F1?

I think that because of this we need to discount the (F1-F0) and because it is a certainty, we use the risk free rate,r, to give (F1-F0)e^-r(T-t)

This is assuming that the F1, and F0 are delivery prices.

To me this isn't taken into consideration when calculating margins, ie the margin is based on (F1-F0). However, I haven't done any questions where the margins included any interest either.

Is there any one who has practical experience confirm or correct this?

 

[samuel_von_gudmange]

Interesting question.

I think Didster is right - the clearing house won't give you £10 now if it is only going to get £10 back when the contracts expire.

I suppose the questions is what's the difference between closing out your future contract and simply selling it (if anything)?

It seems that you could realise the profit you've made on the future position in three ways:

1) Entering into a new future at the current future price. In this way you'll get the difference in prices when the contracts expire (or the dicounted value from the clearing house now).

2) Buying a future that already exists, which has the same future price as the one you already hold. In this way, you'll get the money now - by buying, I suppose I mean that someone would pay you to take the future off their hands.

3) Selling your future.

I think NeedToQualify's original question was to do with the difference between 1) and 3).

Do people tend to close out their futures positions, or sell them? I hope the question makes sense. I'd be interested to know what happens in practice too.

Thanks,



Sam

 

[Zebedee]

My understanding (though I don't work in the field either) is that positions almost always get closed out rather than sold. The reason being that most of the traders don't ever want to take delivery of the underlying asset. Selling the future would leave the buyer having to either close out or take delivery. On the other hand closing out results in a transfer of cash to cover profits/losses but no need for any asset delivery.