Financial Modelling 2557A/B Lecture Notes - Lecture 9: Forward Price, Interest Rate, Risk-Free Interest Rate
17 Apr 2017
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Stock and forward have bid and ask prices. Interest rate for borrowing and lending are rb > rl. Settled daily through market-to-market which triggers interim cash payment. Exchange clearing house is counterparty for each clearing member. There are price limits on futures prices. Counterparties are linked through a specific forward contract. Margin: the deposit the broker requires with futures. Margin account: the account where the margin goes into. Marking-to-market: at the end of of each day, the margin account is adjusted to reflect the gain/loss. If investor does not provide extra funds by specified date, broker closes out position. Investor can withdraw any funds in the margin account in excess of the initial margin. Maintenance margin: the minimum level of funds required in the margin of account. Margin call: request for funds to top up margin account to initial margin level. Happens if balance falls below maintenance margin. Variation margin: the extra funds in margin call.
